As new construction picks up, is China’s property market out of the woods?
New real estate construction in China picked up strongly in the first two months of the year as the positive homebuying sentiment in big cities spread to smaller towns, but analysts are divided on whether the rebound will continue.
New construction rose 13.7 per cent in the January-February period from a year ago, reversing a 14 per cent annual drop for the whole of last year, as sales in terms of area jumped 28.2 per cent. Property investment rebounded in step, for the first time in two years, rising 3 per cent, after a 1 per cent growth for the whole of last year.
“The turnaround in new construction was faster than our expectation,” said Lee Wee Liat, BNP Paribas’ head of Asia property research.
The central government’s strong policy support since late 2014 first pushed up home prices in four biggest cities, then nearby second-tier cities, and has now spread to some third-tier cities, Lee said.
Third- and lower-tier cities were the main drag on new construction last year as these cities have been facing a serious oversupply problem. As a result, most major developers exited smaller cities and piled into first-tier cities. Some of them have since returned to small cities as not all of them face a glut and land costs can get punishing in first-tier cities.
“Developers have spotted the opportunity in third-tier cities again, in particular those in the Pearl River Delta and the Yangtze River Delta cities, buying up land there since the fourth quarter of last year,” said Lee.
He said he expects new construction and investment to further expand in the next 12 to 18 months, as the push by local governments of lower-tier cities to encourage migrants buy flats yield results.
Beijing has also issued a string of stimulus measures this year to boost the sector. These include slashing down payment requirements and transaction taxes, and a cut in bank reserve requirement freeing up more liquidity for the market.
In the second week of March, property transactions in terms of area picked up year on year in 30 out of 34 major cities tracked by property research house China Index Academy. These include first-, second- and third-tier cities. Second-tier cities, in fact, saw the sharpest growth. Sales in Nanjing, for example, rose 112.8 per cent.
But analysts are divided on whether rising sales will lead to more construction and investment. Du Jinsong, head of Asia property research at Credit Suisse, said the January-February data is not perfectly indicative as the numbers tend to be more volatile because they constitute the slack season of the year.
“New construction growth will decline for the full year. The effect of the government’s boost is weakening as most pent-up demand has already been released,” said Du, adding that new construction last year remained high despite a 14 per cent decrease but overall land sales did not pick up.
Land sales is an important indictor for future new construction while new construction is a lagging indicator of future real estate investment. The latter is considered a crucial growth driver as it directly affects about 40 other industries in China.
Government officials are still warning of challenges in the property sector.
“As a result of quick growth in completed units, the number of unsold homes is still on the rise. While land prices in some cities keep climbing, housing development is becoming increasingly expensive,” said Li Jiao, senior statistician at the National Bureau of Statistics.