China: a market update


It’s all about control in China these days. With prices in key first-tier cities, Beijing, Shanghai, Guangzhou and Shenzhen, showing no signs of levelling out, the central government continued its cooling measures in the summer — measures that started to come online late last year. Added to that, currency controls are once again front and centre. Barely a year after Beijing encouraged large institutional investors to look abroad, the central government is advising moderation. Heading into the last quarter of an eventful year, the only certainty regarding China is that stability is the goal, though “Sustained momentum supported by continued infrastructure investment and consumer demand,” will buoy China’s discrete markets, and Beijing will continue to manage the economy and property sectors as it sees fit.

Reeling in prices

Lower LTV ratios, higher down payments and price caps were three other policies that were levelled at the residential market in 2016, and as of the second quarter in 2017, they were having an effect — just not always the intended ones. “Beijing’s luxury residential sales dropped in Q2, but prices remained firm. The Shanghai luxury market witnessed growth in both sales volume and prices, with end-users becoming the dominant buyers,” noted Knight Frank in its Greater China Quarterly Report in August. Developers were cautious with launches, and Guangzhou attempted to clear stock, which resulted in a 50% drop in transaction volumes, though ICBC noted inventory in 25 key cities was finally shrinking. Inventory shrank 1% from July to August, bringing the total stock reduction in the first tier to 19.4% (9.8% in second-tier cities) over the same period in 2016. It’s not perfect yet though. “We noticed the inventories remained at a historical low among 25 cities we monitored, such as Beijing, Shanghai, Hangzhou, Wuhan, Wenzhou and Zhanjiang,” said ICBC in its quarterly market statement. “On the other hand, the total inventory in months increased slightly from 7.1 in July to 7.4 in August.”

Shanghai defiantly saw both price and volume rise despite the measures, and so the next policy was implemented to slow down the price train: price caps. State-owned China Jinmao claims the latest round of price controls to have levied in Shanghai in August have forced it to cut prices on its Daning Jinmao Palace development by 30%, to roughly RMB100,000 per square metre (HK$11,000 per square foot). If the new caps, or governmental “price guidance,” for new flats in several first-tier cities are not honoured, developers will not be granted pre-sale permits.

You might be interested in:
>> Domestic tourism and the hotel property market in China
>> The effect of monetary policies on China's housing prices
>> China's dream city in Hebei

But there’s plenty more policy, and investors are now required to consider it on a market-by-market basis. Regardless of any new rules, Knight Frank expects prices and rental rates to trend up towards the end of the year — with the exception in Beijing, where it expects things will be steady. “High-end supply is expected to rebound slightly, as local authorities push developers to release new projects into the market. Due to the current price restriction on pre-sales certification, developers that purchased land with high premiums may be forced to sell units at prices lower than expected,” said JLL, echoing Jinmao. Of Shanghai, the brokerage guessed that caps or otherwise, “Developers are expected to remain firm on their pricing due to limited upcoming supply. Rents are expected to see moderate growth on the back of solid leasing demand.”


Cash flow

Also in late-2016, Beijing put the brakes on overseas investment in order to stabilise the renminbi and reduce capital flight. Capital outflows have slowed significantly in the months since, though China remains a major global investor and Asia-Pacific’s biggest source of investment capital.

However, in August, the State Council and the National Development and Reform Commission restricted mergers and acquisitions in some industrial sectors. On the restricted list are property and media, while sports assets and gambling-related assets are prohibited. One of the most famous companies to be affected by this seemingly sudden decision was Wanda Dalian, whose investment in a Hollywood studio just as suddenly went under the microscope. CBRE reports that since the outbound currency controls came into effect, overseas property investment has fallen 82%. Not surprisingly, Belt & Road-friendly investments were to be encouraged.

As a result of the latest moves, CBRE also predicts a positive impact on domestic investment in the short term. However, in the long term, investment could be dampened by reduced demand by foreign investors; exit restrictions and capital repatriation are suddenly issues. Regardless, “Capital controls will not exert a significant long-term impact on the domestic property investment market, which will continue to be shaped by broader macroeconomic trends and fundamentals,” said Henry Chin, head of research for CBRE Asia Pacific in its August China Marketflash.

State-owned enterprises are most affected, as they are even more policy driven than their private counterparts. Their investment acquisitions are down 66% over summer 2016. But sovereign wealth funds and private investors remain active: SWFs increased their purchases by 102%, while private players are up a staggering 1,932%. On the more micro level, outbound investment is flirting with status as a trickle rather than a torrent. Individual buyers are still grappling with the rules themselves, and developers in Australia and the UK, where mainland Chinese buyers have traditionally flocked for private overseas investment, have seen the numbers thin out in the same way they are at home. Finally, policy targeting speculators have made it harder for first-time buyers to secure financing. Suzhou’s Agricultural Bank of China promises rates 10% higher than the central bank benchmark for first-time buyers, and Guangzhou’s major lenders are charging 1.05% times the benchmark for first-timers. The average mortgage rate for first-time buyers in China is now 4.99% according to financial analyst Rong360. If the PRC’s fourth quarter numbers don’t change, the regulation game is far from over.

>> Previous issue: Developer Ballymore regenerates London's city island

>> Next issue: The Ginto Residences - The Pavilions first Japanese property