Booming property market forced to cool it

PUBLISHED : Friday, 01 October, 2004, 12:00am
UPDATED : Friday, 01 October, 2004, 12:00am

CHINA'S PROPERTY market is growing too fast for the central government's comfort, and it has intervened again this year to check any trend of overinvestment or sign of overheating.

These macroeconomic measures and tightened credit policies have already been praised for preventing runaway prices and setting a foundation for healthy long-term growth. At the same time, weaker players in the market are expected to fade out in the correction process.

Meanwhile, optimistic industry observers are dismissing concerns about oversupply and express hopes that foreign investment will continue to pour in.

'The overall property market is going very well,' said Guy Hollis, managing director for China at Jones Lang LaSalle (JLL). 'There is maybe a supply bubble in the top-end residential market in Shanghai, but this will not be a big problem.'

Noting signs of excessive investment in the top-end residential sector, the government has taken various market-cooling measures, including reducing the plot ratios of developments.

'Another concern is the poor quality of middle and low-end residential property, but the government has taken measures to counter this,' Mr Hollis said.

With banks tightening lending policies, some of the financially weaker developers had been forced to seek equity partners to help them complete their projects, he said.

Mr Hollis expected to see some takeovers and mergers within the industry, but this would be in line with the government's stated aim to have fewer but better developers.

Foreign property funds continue to show a strong interest in the mainland property market, despite the complexity of moving capital into and out of the country.

Shanghai and Beijing are expected to lead the growth momentum of the mainland market.

Mr Hollis said that apart from office supply in Beijing looking to reach a possibly precarious high ahead of the 2008 Olympics, market prospects were generally good.

Shanghai continued to enjoy strong fixed direct investment, and the demand for office space was higher than ever, he said.

There was also a strong and sustained interest among small investors in residential units.

David Hand, JLL managing director for Beijing, said foreign investors were looking at the range of opportunities, their main concern being market transparency. But with more regulations coming into effect, the situation was steadily improving.

He said the government was closely monitoring land supply in Beijing, pointing out that some proposed projects might have to be cancelled, especially in the office sector.

On the whole, real estate investment on the mainland has been slowing down since March, with banks tightening credit to developers.

Overall, domestic bank loans to developers rose 12 per cent in the first six months, compared with a 59 per cent rise in the same period last year.

Edward Cheung, general manager of the Shanghai office of DTZ Debenham Tie Leung, said most of the government measures to date had specifically targeted developers, and sales volume and pricing remained strong.

'Despite the tightened bank lending policies, we have not seen any significant increase in distressed assets in recent months,' he said.

'In general, developers that have already begun construction are not likely to face any serious cash-flow problems. And among those developers that have yet to pay the land premium and secure the necessary financing for their projects, some have been able to sell part of the project to large developers.'

Mr Cheung expected to see market consolidation over the next year as a result of the macro-economic policies, but he did not anticipate any significant problems.

In Shanghai, the authorities' biggest concern in the past year has been the been an escalation of prices in the city's high-end residential market. The government has responded by introducing measures aimed at cooling the market and lowering speculative demand. For example, in April, the transfer of unfinished flats was banned.

Mr Cheung said the Shanghai government had made a big effort this year to check high-end residential supply, especially in the downtown area, while at the same time increasing the supply of low-price houses.

About three million square metres of low-price housing will be completed in the city this year, and construction work will then begin on a further 3.5 million square metres.

In Beijing, the 2008 Olympics and heavy investment in the city's infrastructure are expected to drive the demand for residential housing.

But supply in new residential projects is expected to drop, this year and the next, because local developers are short of capital to launch their projects. The Beijing government has prohibited private land sales, and all land transfers are being conducted through public tender and auction.

Vincent Luk, general manager at DTZ's Beijing office, said all the government measures introduced this year were designed to correct structural problems in the property market.

'In the long run, they help to establish a more healthy, transparent, open and fair market environment, which is welcomed by foreign investors,' he said.

'Foreign investors are keen to invest in Beijing offices. Investors focus on mature, well-located grade-A projects under a single ownership. However, most of the owners of such projects are not willing to sell,' he said.

Foreign investors, mainly fund investments, were seeking entry points into China's property market, he said. Led by companies such as Rodamco Asia, AIG and GIC, these funds hold out promise for China's economic prospects.

Mr Luk said the oversupply predicted for next year was expected to exert pressure on office rentals and prices in Beijing.

In Shanghai, recent government efforts to cool the market have prompted some foreign investors to take a wait-and-see approach to residential investment.

There is speculation that the government may increase interest rates, and this has resulted in some market uncertainty.

However, many investors were taking the opportunity to shift some investment into Shanghai's office and retail markets, both of which were experiencing a strong leasing and sales demand, Mr Cheung said.

'We remain optimistic about the overall development of Shanghai's real estate market in the coming years,' he said. 'There are signs pointing to success in the government's goal of cooling sectors of the market where there was some concern of overheating.'

The government has also introduced several policies in the past year aimed at stabilising the volume of new supply in the pipeline and increasing market transparency. These policies should allow for stable and healthy growth in the coming years.