Crowdfunding clicks on to property flipping
With just 11,000 yuan (HK$13,867), 50-year-old Deng Bangfu made his first property investment in China, flipping it in just two months for a profit even as the nation's home prices fall.
Deng and about 300 other investors bought a 14.9 million yuan townhouse in June in the southern Chinese city of Dongguan and sold it in August for 16 million yuan. The vehicle: a peer- to-peer lending and financing website called Tuandai, which is testing a crowdfunding product that meets developers' desire to quicken sales by tapping demand for better returns.
"Now I can tell people I once owned a townhouse, which I could never afford myself all my life," said Deng, an accountant at a technology firm in Dongguan.
"We know that local governments have started loosening home purchase restrictions. As soon as banks ease mortgage curbs, home prices will quickly rebound."
Online investors, who since 2011 helped drive a 50-fold increase in financing through peer-to-peer websites such as Tuandai, are turning to property as falling home prices prompt the government to ease curbs aimed at stamping out speculation. Officials are seeking to revive local-government revenues at the risk of bringing home-flippers back to the market.
"If liquidity recovers, home prices start to go up and sentiment improves," said Andy Chang, Hong Kong-based property analyst at Fitch Ratings.
"Peer-to-peer lending will surely play a stronger role, pushing the waves because it's pure speculation or investment demand."
Speculative buying - selling assets in a short period of time - accounts for more than 20 per cent of demand in first- tier cities, which include Beijing and Shanghai, JPMorgan Chase analyst Ryan Li wrote in a report last month.
Investors accounted for 40 per cent of homebuyers in 2007, when Shenzhen World Union Properties Consultancy Inc. started asking clients their reason for buying. That was three years before former Premier Wen Jiabao imposed home-purchase curbs and raised down payments to prevent a housing bubble.
Home sales plunged 10.5 per cent in the first seven months from a year earlier amid tight credit, according to government data, reversing a 27 per cent jump last year. New home prices fell in 64 of the 70 cities tracked by the government in July from June, the most since January 2011.
To stem the downturn, 37 of the 46 Chinese cities that imposed limits on home ownership since 2010 to snuff out property flippers have relaxed or scrapped restrictions on the number of apartments one can buy as of September 3. The nation's biggest lenders cut interest rates on first mortgages in Beijing and Shanghai.
"When the market recovers, local governments change their tune and the media is again saying things like 'the property industry is overall healthy'," said Xu Hongwei, founder and chief executive of wangdaizhijia.com, which tracks more than 1,000 peer-to-peer loan websites. "I won't exclude the possibility that these investors would say 'OK, property is fine now'."
A removal of home-purchase restrictions may prompt home prices to "rebound with a vengeance", SouFun Holdings, owner of the nation's biggest real estate website, said in an report last month after an online survey of 599 people. Almost 80 per cent of the respondents said such curbs in Shanghai had hindered their purchase plans, with 42 per cent expecting the city to relax the limits later this year.
The risks of online property speculation are "very high" because anybody with 1,000 or 2,000 yuan can take part and many of them may not understand investing, Standard & Poor's Hong Kong-based analyst Fu Bei said.
"Such investments are irrational, and they won't become a trend" because it's short-term speculation not supported by prices in a market downturn, said Zhang Haiqing, Shanghai-based research director at Centaline Group. "This is all fairly crazy."
Fu said prices will keep falling because of the supply of unsold apartments. The inventory of unsold new homes in 20 large cities jumped to an average of more than 23 months of sales in June, according to Shenzhen World Union data compiled by Bloomberg.
Bricks and mortar have historically offered better returns in China. The average home price, excluding government subsidised housing, jumped almost 180 per cent from 2000 through 2012, according to official data. The benchmark Shanghai Composite Index gained less than 10 per cent in the period.
"There aren't that many investment channels with satisfactory performance in China," said Fitch's Chang. "If you look around, property remains relatively good among industries."
That's what the Dongguan online investors, so far free of any government oversight, are betting on. Tuandai attracted 288 of them, including Deng, to take part in the purchase of the 7,060 sq ft townhouse on June 17. The order book was filled in 21 hours.
Tuandai negotiated to pay 25 per cent below the market price for Deng's townhouse and got similar discounts for another 17 Citic homes.
A buyer agreed to pay 16 million yuan for the first property and the transaction was completed August 23, according to the Tuandai website. That handed Deng and his fellow investors an annualised return of 40 per cent, more than 13 times the benchmark one-year deposit rate, according to the website.
Dongguan eased property policies on August 10, expanding tax favours and scrapping price controls, according to a statement on the city government's website.
About 60 per cent of investors lending through peer-to-peer websites had annual income of less than 100,000 yuan, 85 per cent of them male, and 80 per cent of them were between 20 and 40 years old, according to wangdaizhijia.com data.
Peer-to-peer lending has taken off in China since 2011 as traditional methods of private lending among family and acquaintances, part of the country's unregulated US$6 trillion shadow banking system, move online.
The little-supervised platforms pool money from small investors with as little as 50 yuan to finance anything from wedding preparations, personal medical expenses to car purchases.
The total outstanding amount of investments rose 11 per cent from July to 58.1 billion yuan as of August 31, compared to 1.2 billion yuan at the end of 2011, according to wangdaizhijia.com
Sites such as Tuandai are able to negotiate large discounts as developers in China's crowded homebuilder market are eager to revive slumping sales.
More than 10 smaller developers have approached Tuandai for help to sell homes, according to chief executive Tang Jun.
Average prices at the Citic development fell to 35,000 yuan a square metre in June, from 40,000 yuan in October 2010, according to information on Sohu.com's real estate portal.
"Some developers are pushing out some of their products at low prices because homes are not selling well, and some crowdfunding websites are just seeing the business opportunity," said Dai Fang, a Shanghai-based analyst at Zheshang Securities. "The key question is: what if they can't sell it?"
"For the long run, home prices will rise," said Deng, who plowed 55,000 yuan into the third townhouse, five times his first investment and almost double the one he made in the second Tuandai offering. "Even if we can't sell it in the market, the property will still be there."