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China Property

Shanghai authorities get more involved in supervising lottery system used by developers to allocate properties

The price of new homes is now lower than surrounding second-hand properties, making the chance to buy a new home the equivalent of winning the lottery

PUBLISHED : Friday, 05 May, 2017, 8:00am
UPDATED : Friday, 05 May, 2017, 11:01pm

Rising irregularities in Shanghai’s home sales process have caught the attention of policymakers, as the city’s government announced it will get more involved in supervising the lottery system used by developers to allocate their properties.

But some analysts said the root cause was actually the extremely low supply under the local government’s direct price intervention, which had led to trickery and arbitrage opportunity for some property salesmen.

According to a document released by the Shanghai housing authority on Thursday, on any new project that has attracted more clients than the number of units available for sale, a lottery draw will be conducted under the supervision of the city’s notary office.

The move is aimed at further regulating home sales activities in the city and “curb speculation”, the official document said.

For Shanghai property, time is money

New housing supply has been tightening in Shanghai and most new units have to be parcelled out through a lottery draw by developers.

The situation deteriorated this year as the government postponed the issue of sales permits for many high-end projects and forced newly launched flats to sell at government-guided prices, which in many cases were even lower than nearby second-hand homes.

The policy was intended to cool the market, but in turn has drawn flocks of panic buyers to the discounted units, making the supply/demand imbalance even more serious.

“There has been a lot of illegal transactions under the lottery system,” said Yan Yuejin, research director at the Shanghai-based E-house China R&D Institute. “If the process is done by a notary’s office, it will help protect the interests of every qualified buyer.”

To grab a precious chance to buy a new home, homebuyers have had to resort to “back door” tactics such as additional fees or even bribery.

“The root cause is short supply. The lottery system just addresses the problem on the surface. To solve the problem long term, governments should tackle the supply-side,” said Liu Feifan, a property analyst with Guotai Junan Securities.

At the end of April, the inventory of new flats in the city dropped 30 per cent year on year to 6.3 million square metres, the latest E-house China R&D Institute data shows.

Kathy Ji, a 32-year-old Shanghai lawyer, said her recent home purchase experience was awful.

“A salesman asked me for a 500,000-yuan [US$72,500] bribe to secure a qualification when I showed interest in a unit at a new project in Xuhui district, so I gave up” she said.

Developers have also complained they cannot gain sales permits if their price tags are deemed too high by the government.

The developers who bought land parcels at high prices and can’t expect profits under government-imposed prices have chosen to hold back their projects, further exacerbating the supply shortage.

The results of government controls are that new home prices have remained subdued. The price of new homes in Shanghai fell 0.1 per cent in March over February, according to National Bureau of Statistics. But in that month secondary homes prices rose 0.7 per cent, underlying the torrent of demand.

“Most of my friends just look for secondary homes, because they just can’t find new homes for sale. I’m also considering buying a home but as soon as I hear about a project on sale, all the available units had already been sold,” said Feng Qian, a 26-year old Shanghai office worker.

Homebuyers either get a heads-up before a new project starts sale from personal “connections”, or pay a deposit, usually less than 50,000 yuan, to be included into the developers’ lottery system, according to an industry insider who declined to be identified.

Many homebuyers are also asked by developers to pay so called “decoration fees”of 10,000 to 20,000 yuan per square metre, in an effort to skirt government’s price controls.

The situation is similar in other top cities including Beijing, Tianjin and Hangzhou.

Throughout the National Labour holiday (April 29-May 1), a traditional prime time for developers to roll out new projects, not one single project was launched in Beijing, according to Yahao Consultancy.

The official document also said that any developers or agents that were discovered to be creating “panic buying” and “speculating on the lottery tickets” would be put on an industry blacklist.

Following the new policy on Thursday night, local developers Shanghai Industrial Development fell 0.4 per cent, Bright Real Estate Group fell 2.4 per cent while Greenland Holdings rose 0.3 per cent and Shanghai New Huang Pu Real Estate fell 0.2 per cent. Industry leader China Vanke also fell 0.7 per cent.

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