• Fri
  • Aug 29, 2014
  • Updated: 10:28am
CommentInsight & Opinion

Mass default of property trusts unlikely in China

Rong Ren cites the mitigating factors, including solid demand for housing

PUBLISHED : Friday, 21 March, 2014, 6:34pm
UPDATED : Saturday, 22 March, 2014, 1:53am

It is common these days to pick up a newspaper and find an article about China's shadow banking sector. By definition, shadow banking in China includes lending from non-traditional financial institutions, such as trust companies, wealth management companies and rich private individuals.

There are even peer-to-peer websites that, through crowd-sourcing, facilitate personal lending to individuals to help them set up businesses, renovate homes, and buy things from cars to iPads. In China's less regulated market, these non-mainstream financing avenues are flourishing.

This is especially true in the real estate sector. Property developers in China have found it extremely difficult to undertake a listing, conduct a rights issue or issue bonds (although a very small number were permitted last year). This has left them with limited means to raise capital.

Today, however, trust companies in China are providing those means. Chinese trust companies, considered part of the shadow banking sector by both the Chinese and international media, lend to developers - and in massive amounts.

This lending has caused a flurry of concern about the future of China's real estate market and whether it will see a wave of trust defaults and - ultimately - whether the debt bubble will burst. There are several factors, however, that mitigate potential default risk.

First, the fundamentals for real estate demand remain very strong. Real wages in China are rising and household savings are very high, at about 30 per cent, despite the push to promote consumption. The government's policies to boost service-sector growth and upgrade manufacturing, along with urbanisation and rising incomes, will, I believe, fuel demand for real estate for many years.

Additionally, China is liberalising its monetary policies. Market-based reforms are emerging, allowing the market pricing of interbank certificates of deposit. The central bank is expected, in time, to remove the ceiling on long-date deposits, implement a deposit insurance scheme, and pass a bankruptcy law for financial institutions. This will hopefully bring discipline and market protections into the lending market and boost consumer confidence.

The question remains whether, after nearly a decade of control over the real estate sector to manage prices, Beijing will relax its grip. Given the number of people who depend on the real estate and ancillary sectors, the authorities would probably step in if things started to get out of hand.

A hard landing is unlikely in the property market, even if growth slows, given that the government appears fundamentally pro-growth and the macro drivers of China's economy are well supported.

Let's not be too naive, though, and think that the road ahead will be forever smooth. China's real estate market has been on an upward trend since its privatisation some 25 years ago, and no one in China has yet experienced a significant market downturn. But this is something that concerns those of us with experience outside China, as markets do not always go up (even if we want them to).

From an investment perspective, exciting opportunities have arisen as developers seek to deleverage. At the same time, we need to focus on the risks of whether real estate projects can actually deliver a return on investment.

Ultimately, we must not forget that, at the end of the day, real estate is essentially the same everywhere in the world - illiquid and highly cyclical, and you need to build something of value on that piece of land or add value to an existing building.

It remains a mid- to long-term endeavour, and buying cheap is only one part of the equation.

Rong Ren is chief executive officer of Harvest Real Estate Investments

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johnyuan
After reading this article, I am not sure why China is unlikely to have a mass default on property trusts.
johnyuan
Real estate everywhere in the world may share a common characteristic in the intrinsic property of a piece of land with or without improvement that is unmovable. More differentiable, real estate is straightly about a piece of land. More talks about it as a real property.
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US being much more matured in development than China, its economy don’t depend on property development. In fact it discourages property speculation for its undesirable effects on society with rules and taxes which are devised and maintained currently. For individual especially, owning a property is not a means to make an easy fortune.

Different countries have different ways for ownership of real estate / real property with tax obligation. In US, a property owner may subject to multiple taxes of different jurisdictions.
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All in all, China has a very different system for its real estate from the rest of the world. Owners of real estate in China only pay property tax once and with a time limit on ownership. In US ownership is permanent as long as one pays the required taxes annually.
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For those in Hong Kong and mainland they should also take notice that US discourages property speculation by charging capital gain tax at the same rate as profits from business.
 
 
 
 
 

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