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China Property

Developers brace themselves as Beijing gets tough on flats sold on commercial land

China Vanke, Longfor and Evergrande are among the big-name builders whose projects are affected

PUBLISHED : Tuesday, 04 April, 2017, 6:58pm
UPDATED : Tuesday, 04 April, 2017, 9:21pm

Property developers are facing a potentially huge dent in their sales in Beijing after the municipal government declared war on residential apartments being sold on land intended for commercial use.

As part of a broader campaign to curb the capital’s frenetic home buying and skyrocketing prices, the Beijing authorities on March 26 banned all sales of new apartments built on plots that were originally acquired as commercial or office land.

The converted commercial projects had become increasingly popular as the dwindling supply of new residential land made them a more affordable option, particularly among young buyers.

Until now, the so-called “commercial apartments” also had the advantage of not being subject to home purchase restrictions, meaning non-local hukou – household registration – holders could buy as many units as they liked.

But under tough new restrictions, only people with Beijing hukou – and non-hukou holders who have paid social security for five consecutive years and do not already own a home – can buy them.

And they must be existing units. The new rules stipulate that new commercial apartments cannot be sold to individuals at all.

Additionally, banks are now banned from extending loans for the purchase of such apartments, which means buyers will have use their own cash.

Beijing banned the sale of flats converted from commercial or office space

“The policy has literally reduced such product’s transactional value to zero, as it has become very illiquid,” said Yan Yuejin, a research director at the E-house China R&D Institute.

In the days following the introduction of the buying curbs, the local authority went further, demanding that all property agents in the city pull the commercial apartments off their shelves, making it much harder for owners to sell their properties.

Some 38 estate agency branches across the city, some owned by big names such as Homelink, 5i5j and Centaline, have been shut down for violating the rule, and a further 91 have closed “voluntarily”, according to a Weibo post by Beijing’s housing commission. After a raid, the commission found the brokerage unit of Fang Holdings was in breach of the ban, and revoked its licence altogether.

Beijing yanks license of Fang Holdings’ unit for defying rules on converted flat listings

The government identified six commercial projects that were being marketed for residential purposes. All of those properties were barred from being sold, a move that affects China Vanke, Longfor Properties and China Evergrande.

Before the ban, the project developed by China Vanke was the city’s top seller, with 347 units worth 1.07 billion yuan sold in one week (March 21-26). Adjacent to that, the Evergrande project had sold 92 units worth 577 million yuan. Neither Vanke nor Evergrande’s Beijing representatives could be reached for comment.

Across Beijing, in the three days after the ban was introduced just seven commercial apartments were sold, according to Centaline, down from 850 in the three days preceding it.

Inventory pressure is huge. There are about 250,000 existing commercial apartments in Beijing, and another 150,000 units of potential supply, according to Centaline data. More than 90 per cent were sold to individuals, and the remainder to corporations. Even including secondary homes, “commercial apartments” accounted for a third of the whole transaction in the capital.

Many experts say it is the local government itself that created the problem. Five years ago, faced with a glut of commercial and office land and a shortage of residential land supply, Beijing actually encouraged developers to build apartments on office land. By 2015, sales of such apartments made up 29 per cent of total new home sales.

It became a big draw amid surging home prices, especially for youngsters who cannot afford “ordinary homes”, and non-local buyers who are barred from buying them. So far this year, the ratio has surged to 60 per cent .

Guo Yi, marketing director of Beijing-based Yahao Real Estate, said one way out for developers is to rent this type of unit out. A cash flow problem can be averted by securitising future rent of these units.

Last December, when Beijing’s new land sale policy stopped Vanke from selling properties on land it had won at government auction, Vanke Beijing’s president came up with the idea of wholesale renting residential projects built on the plot to corporations, who would then lease them to employees. Vanke is reportedly in talks with several companies, including Xiaomi.

This could be a solution for getting around the strict regulations on commercial apartments, experts said.

Wang Chen, head of the consulting division at Cushman & Wakefield North China, said whether developers can sell their housing stock depends on their operational capacity as well as their projects’ proximity to subway stations.

The impact of the new curbs is somewhat muted for national developers, whose sales in Beijing are only a small part of their national portfolio, he added.

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