China property

Mainland developers still in the early stages of diversification, says Savills China chief

Albert Lau adds it will take time for them to undertake the transition

PUBLISHED : Tuesday, 30 August, 2016, 7:04pm
UPDATED : Tuesday, 30 August, 2016, 7:43pm

Albert Lau, a Hong Kong native who lives in Shanghai and has worked in real estate services in the mainland for more than 18 years, is responsible for managing 13 Chinese offices for the London-based global property consultancy Savills, as well as overseeing the development and implementation of strategies and policies within these cities.

The chief executive of Savills China said the current trend of mainland Chinese home builders investing in commercial properties for diversification and long-term stable returns is a natural move.

But compared to seasoned Hong Kong commercial property developers, they still have a long way to go before successfully realising the transition.

The market is worried China will tighten credit policies as the property market is too heated in some cities. What do you think?

I don’t think liquidity will be tightened in the second half. Quantitative easing is a global trend, the whole world including the US, Japan and Europe, have cut interest rates. It is unlikely China will go against the trend, especially when our export and manufacturing performance is still weak. So I expect the overall easing environment to continue.

The ample liquidity would make it easier for homebuyers to access low-interest mortgages and boost the real estate sector.

Although banks in Shanghai have reduced mortgage loan amounts for some clients under the city government’s new rules since March, the interest rate for qualified clients is still very low.

I don’t think such restrictions will be tightened further as transaction volume has already halved compared to the beginning of the year. The government is hoping for a stable property market – not one that rises or declines too fast.

Shanghai’s property market remains robust thanks to influx of talent, says Savills

Is there a bubble in some of China’s first- and second-tier cities where home prices continue to hit new highs?

Overall the risk is controllable. The current level of bad mortgage debt is only 2-3 per cent, far below that of loans to enterprises, which can reach 7-10 per cent. The real risky sector is mainland firms borrowing [from banks].

The property market is still healthy. Even though some residential land recently sold at very high prices, it’s still a small number that isn’t representative of the whole market.

Many developers are looking to expand their commercial property portfolio for diversification, such as office buildings and shopping malls. But they face challenges, and growth is very slow. Developers such as Soho China have even had to sell prime office building assets to pay off debts. What can [mainland firms] learn from seasoned Hong Kong developers that have been successful in both markets and own large investment property portfolios?

Operating commercial properties is very different from home sales. Mainland developers in the past have been focused on buying land and then building apartments for sale in the short term. It will take time for them to undertake the transition.

There are two keys for success. First, having a team with knowledge of leasing and long-term operations is very important as the quality of operations will lead to pricing power of rentals. The developer will encounter many difficulties if it is not equipped with an experienced management team.

There is no need to stop home sales as it still provides certain cash flows for developers to pay off debt

Second, developers should reduce their debt ratio first. As home building depends heavily on borrowing, developers’ leverage is high. It is impossible for a developer to hold properties expecting long-term return when their debt ratio is over 80 per cent and they are busy with imminent debt repayment, as cash inflow in the first few years of developing a commercial property can be very low. That is also why we call commercial property “a business for the rich”.

There is no need to stop home sales, as it still provides certain cash flow for developers to pay off debt. But developers need to slow down their expansion to do more high-quality projects while reducing their borrowings. Some developers may also choose to sell non-core assets to lower their debt ratio so they have the capability to own properties.

Do you think Shanghai’s office building market is oversupplied?

The vacancy rate is still very low in downtown areas, about 3-4 per cent. But there is a large supply coming in non-core areas, such as the Hongqiao transportation hub, in the next two to three years. And their rentals will face pressure under fierce competition.

But I don’t think developers will seek to change the use of the buildings to absorb the stock as the procedure is very complicated and the cost is not cheap.