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Chinese whispers
If the rumours are true and the central government continues to relax its grip on the property market, it will give a much-needed boost to the local real-estate sector, says Alex Frew McMillan
"Premier Wen Jiabao has told provincial officials that they need to 'properly guide and control' the real-estate sector, which he said is a pillar of the Chinese economy supporting sales of everything from steel to home electronics"
Reflecting on the US financial crisis of 2007-2008, we sit here as little more than interested observers, affected by forces we can’t see or direct, our butterfly wings buffeted by winds that started blowing on the other side of the Pacific. But there is a factor closer to home that has a much more direct impact on Hong Kong’s property market. The ‘austerity measures’ that China introduced over the last two years hit home in 2008; after several failed attempts, they finally caused the runaway train of property prices in the big mainland cities to grind to a halt.
Now, with Chinese property markets correcting quickly and the global crisis threatening to pile on further pain, the question is whether the central government will relax its tight grip. There are signs it is doing so already, but how fast it moves and how far it goes may well be the determining factor in how Hong Kong’s property market performs in 2009.
In early 2008, the financing restrictions on both Chinese individual buyers borrowing for their own homes and capital requirements for large overseas investors looking to move money into China cut off the flow of money into property. Local brokers say the supply of mainland Chinese buyers looking at property in Hong Kong started to dry up in February, both because it was harder to move money across the border and because property in cities such as Guangzhou and Shenzhen was already correcting. The mainland buyers felt a little less sure of themselves and their bank balances as a result.
Institutional investors and developers say they also found it harder to get projects approved and zoning restrictions toughened. Sometimes tax rules and levies that had been on the books for years but never enforced suddenly started to apply - or looked like they might apply - and the uncertainty put big investors off.
The specifics changed a little depending on the city, but the message was clear - stop driving up prices of luxury housing, stop building luxury units, only cheap low- or mid-end housing will be approved, and if you’re a foreign investor trying to buy in, you better bring a big check book.
“I would say that the Chinese government is trying to prevent foreign direct investment in this sector,” Guillaume Rougier-Brierre, a Beijing-based lawyer and partner with Gide Loyrette Nouël, says. “They have made it quite difficult.”
“China is still a controlled economy,” adds Kenneth Gaw, the president and co-founder of private equity fund and property developer Gaw Capital Partners. “You do have to listen to what the government is saying and look at what they are saying and what they want to encourage.”
Gaw says the government found it convenient to target overseas investors as the source of the ‘hot money’ in Chinese real estate, although the driving force was really domestic developers and speculators. “From a political rhetoric point, it is always good to use foreign investors as an example, even though the percentage of foreign investors in China is not that big,” he explains. “China is saying they don’t want foreign investors who are speculators.”
The biggest cities - what investors call Tier 1, normally classed as Beijing, Shanghai, Guangzhou and Shenzhen - were so flush with money looking to get into property that the government didn’t need to encourage the sector. If anything, authorities wanted to block off a stampede that was racing out of control.
Many observers say the market needed a bit of a check. The demand from mainland buyers is so strong, with the new middle class making an apartment purchase a modern must-have, that speculators can easily drive prices to unmanageable levels. Many Chinese developers went public on the stock market and used that cash to buy land, causing land costs to surge, too.
“Clearly a lot of manipulation of land has taken place in the past,” Rougier-Brierre, the lawyer, says. If that continued for a prolonged period, it could have caused serious social unrest.
“The Chinese government’s involvement in the real-estate market is not unusual for a communist government,” says Richard van den Berg, the country manager for Greater China at ING Real Estate Investment Management. “But it is also not unusual for a capitalist government in a country like Holland, where I’m from, where they control land issuance and have a lot of other regulations. It is not just typical for China - it happens all around.”
Now the prospect is of unrest if people who have lost lots of money in the stock market - down around 60 percent in China this year - and in property - down 20 percent to 30 percent in the biggest cities - get disgruntled and feel the government isn’t doing enough to help them, and is in fact hurting them.
“Now we are telling our enterprises to adopt a new mindset - we have to focus on stability, and we have to be able to survive when there are great risks,” notes Bin Zhong, the executive secretary general of the China Real Estate Chamber of Commerce.
The chamber has been trying to get Chinese developers to have more realistic expectations about the kind of profits they can expect to make, and is encouraging them to invest long-listingsterm instead of looking to make a quick yuan. It also mediates with the government, trying to explain when the rules they’ve introduced need relaxing. China may be approaching that point, the chamber thinks.
“We believe in the near future there should be some adjustments on tax and tax arrangements,” Zhong says. “We believe the new round of adjustments will be good for the new round of investors.”
The concept of buying and owning private property in China has only been around for the last 20 or so years, though. Outside the biggest cities, there are almost no transactions for properties that aren’t new, showing how immature the market is. Most developers and real-estate investors hope to shoot the moon buying land and building speculative projects (the riskiest type of property investment), and there is little in the way of property funds that buy buildings to hold them for the rentals and the yield they generate.
“We have to stimulate the market at the right time, and also work on the second-hand market,” Zhong admits. He believes there will be big demand for a more varied kind of property in China in the future, with huge potential for projects such as retirement developments, with condominiums aimed at people over 50
China has announced a huge, CNY4 trillion (HK$4.6 billion) stimulus package to help keep its economic growth on track. Though economists say it isn’t clear how much of that is new spending, the central government is certainly putting its money where its mouth is, and is set on protecting a growth rate of 7 percent to 8 percent.
It has also taken a cleaver to interest rates, reducing the cost of existing mortgages, and in October reduced the amount of downpayment that homebuyers had to deposit as well as cutting some transaction taxes that purchasers have to pay when buying a home.
Premier Wen Jiabao has also told provincial officials that they need to “properly guide and control” the real-estate sector, which he said is a pillar of the Chinese economy supporting sales of everything from steel to home electronics.
Analysts say this suggests the government is going to continue to introduce supportive measures. The market in China may turn around in the second half of the year, industry insiders say. It would also act as a strong gust of wind behind the now-becalmed sails of Hong Kong’s property market.
Hong Kong is likely to see a more prolonged ‘U-shaped’ and not a sudden ‘V-shaped’ recovery. But as van den Berg says, “It’s a pure timing issue. I think we’ll see the recovery start sometime next year, on the residential side.”
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