World’s eyes on China as residential property market shows signs of recovery

Pent-up demand has led to increasing property prices in China with urban real estate prices rising for the first time in months according to official figures.While some analysts are cautious and say that they do not think it is the start of a sustained recovery in China's property market others believe that the government's 4 trillion yuan ($585 billion) sustained stimulus plan is actually working.

What is happening is regarded as a key indicator for global property markets as everyone looks to China for signs of recovery.

And it is obvious that the Chinese government is determined to drag the economy back into super status. Although China's economy expanded by 6.1% year on year in the first quarter of 2009, the lowest growth rate in 10 years, the government is actively supporting the real estate industry.

While the much publicised plan by a local government official in Hubei province to boost the economy by encouraging people to smoke met with derision, a series of central government stimulus measures for the real estate sector is having an effect and there are no signs of the governments growing cool in terms of investment in the industry.

Just last week the Chinese government announced another new measure to stimulate the real estate market that is a crucial driver of the national economy. China's state council announced a cut in the minimum amount of capital required to start certain new investment projects including residential property. The current minimum for developers is 35% and the new level will be announced soon, a spokesman said.

How much  credit you give to official figures in China is a matter of debate, never the less the latest data from the National Bureau of Statistics show that residential property transactions, excluding social housing, rose 24.7% by value in the first quarter of 2009 compared with a year earlier.

Some analysts responded by saying that the steep decline in property prices is over after a slump of more than 20% in some cities in the past year but warn that it is not the same as saying a rebound in prices is in the offing.

'A big difference in this recovery is that it is coming from the end-user market. We are not seeing significant numbers of investors coming back into the market looking at capital appreciation,' said Anton Eilers, executive director for China's residential market at CBRE.

This is in stark contrast to 2005 to 2007 when speculative buying was at its peak, and means that if prices rise by more than owner-occupiers expect sales volumes will immediately drop, he warned.

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There are signs of a rising demand. When China's housing market was booming it was common for buyers to queue the night before a developer started pre-selling a project still under construction. Such scenes have not seen for more than a year since the market went into a decline but in Beijing two weeks ago there was a glimmer of the previous fever.

Couples lined up to buy apartments in a new building in eastern Beijing. 'We came here yesterday afternoon. It's still a bit cold on a spring night,' Qu Qiuping, a woman in her forties who queued overnight with her husband to buy a 60 square meter one-bedroom flat told the Chinese news agency.

More than 80% of the apartments in the building were sold by the end of the first day, according to Wang Dan, a sales agent for the project.

There seems to be general agreement that the stimulus packages are working.

While the mid-end mass market is warming up, CBRE's Eilers said a recovery in the luxury residential sector will depend on a firm turnaround in the overall economy.

With real estate accounting for nearly a quarter of Chinese fixed investment, the authorities are doing their bit to help. Wensheng Peng, an economist at Barclays Capital in Hong Kong, welcomed the latest announcement.

'Overall, we take a view that this change will help to boost fixed asset investment by reducing the entry requirement for investors and by allowing bank credit to play a bigger role in project financing,' he said.

Beijing has also cut mortgage rates and transaction taxes to encourage owner-occupiers to take the plunge into the market. Some cities, including Beijing and Shenzhen, have gone further and taken steps to stimulate demand from foreigners and for luxury homes.

The various measures have driven cash buyers, particularly newly wed couples, back into the market. But analysts point out that the luxury real estate market and larger property units are still in the doldrums and they need to move for an effective recovery.

One of the problems is that developers in these sectors still have a lot of unsold inventory on their hands and prices in this area are not yet low enough to stimulate demand. Lu Zhengwei, chief economist with the Industrial Bank in Shanghai, reckons that around 80% of developers' inventories need to move. 'China still needs to boost demand for larger units and luxury homes,' he said.

But developers are showing little appetite for reducing prices and they have not experienced great difficulties securing loans, unlike developers in many other parts of the world.

Loans are easier to get than they were six months ago and the corporate debt market is taking off. Beijing has said it will launch a pilot scheme for Real Estate Investment Trusts soon. In March developers SOHO China secured a 10 billion yuan credit line with Bank of China for five years so that it can expand through acquisitions.

Wang Chen, head of research as DTZ Beijing expects prices to be more stable in the coming months. 'Prices will move up and down in a limited range. It's very unlikely that we'll see another fall as steep as the one we've just experienced,' he predicted.

China property stocks are doing well. Guangzhou R&F Properties said its contracted sales in April jumped 80% from a year earlier to 2.34 billion yuan ($343 million) and it was confident of achieving its interim sales target. It has set a sales target of 22 billion yuan for 2009 and about 10 billion yuan for the middle of the year.

But crucial to recovery is the non residential property market and here we find a very different story. Although sales and prices in the commerical property market are up, mainly due to investment activity, rents are down and vacancies are soaring. Analysts warn that this indicates a recovery is some way off.

In the commerical property market, both sales and prices were up, because people were buying properties for investment. Yet rents were down and vacancies were up, indicating that a rebound in demand was some way off, analysts said.

'Unlike homes that are for shelter, the buyers of office buildings, retail and industrial properties purchase them for investment purposes or their own business needs,' said Chen Sheng, vice president of the China Index Academy, a private-sector research institute that specializes in real estate.

Also a report by DTZ shows that leasing demand for office space in Beijing began to dramatically weaken in the first quarter of this year. The average first quarter office building vacancy rate in the capital city rose 5.72% from the fourth quarter of 2008 to 18.97%. At the same time, average monthly rents for Beijing office buildings fell 9.26% quarter on quarter.

Richard Wang, director of DTZ's north China consultancy department, said over supply was a key problem facing the Beijing office property sector. He added that 1.3 million square metres of new supply would come into the market in Beijing this year, mostly in the central business district, where many multinational companies were based. That's more than double the 603,000 sq m of new office building space that came into Beijing's market in 2008, according to DTZ figures.

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Beijing is not the only city with an over supply problem. Figures from Jones Lang Lasalle indicate that the office vacancy rate in Guangzhou, capital of Guangdong Province, was 21.2% in the first quarter of 2009, unchanged from the fourth quarter of 2008, while average rents fell 8.8%.

Guangdong, famous for its toy, bag, suitcase, shoe and home appliance exports, has been hard hit by falling export demand since last year with many factories and export trading companies going bankrupt. But the province's economy expanded 5.8% year on year during the first quarter, just 0.3% below the national average.

The main problem for commercial property is the weakening willingness to invest by domestic entrepreneurs, according to CIA's Chen. 'The crux of the problem in the Beijing and other metropolitan markets is that actual demand fell short of expectations, and this divergence could not be eliminated in a short period,' Chen said.

Retail property could lead the recovery in the commercial real estate sector. Despite the current weak retail climate, CIA found that sales of retail property nationwide rose to 6.133 million square metres in the first quarter from 5.688 million square metres in the fourth quarter, echoing the home buying revival.

Interest in retail properties that have good transportation access, good construction quality, facilities and stable rental income is ongoing. Some real estate investors are beginning to regard retail properties as one of the better options.

In some cities with untapped consumer potential, foreign and domestic developers are continuing to invest in building more retail properties. Indonesia based Ciputra Group is planning a $3 billion project to build shopping malls, hotels, cinemas and high-end residential properties in Shenyang.

Also there are signs that domestic and foreign institutional investors, especially from Singapore and the US, have pooled funds to purchase Chinese industrial property in expectations of a rebound.

Now all eyes will be on the next round of economic figures to be published in July to see if these early signs of recovery in the Chinese property market can be sustained.