Affordable ambitions

It’s as if they hit the jackpot. This summer about 1,940 families were selected to purchase affordable apartments in Shanghai through a new government housing scheme. To qualify for the trial project, a family’s average annual income per capita must be less than RMB 27,600 (US$4,077) with each member’s share of current living space fewer than 15 square meters.

While China’s property boom has been a boon for the country’s wealthy elite, home ownership has remained an unattainable dream for many of the county’s low-income workers and even middle-class professionals. 

But now, Shanghai officials are planning to build a further 1.2 million low-income apartments in non-central areas of the city. Chongqing also announced in September that it will construct 40 million sq m of public housing over a three-year period.

These programs come after the central government set an official target of building 3 million low-cost housing units and renovating 2.8 million others this year. By 2011, Beijing hopes to bring as many as 13 million new affordable homes into the mix.

Learning from the past

Affordable housing schemes are not new to China, though they have enjoyed little success. Now, though, such initiatives have unequivocal central government backing. The recent construction starts are being presented not only as part of plans to curb the country’s overheated housing market, but also as an effort to address income disparities and facilitate urbanization.

"Obviously the central government is facing significant social discontent among a large portion of the population who cannot afford to purchase or rent homes," said Anton Eilers, executive director of Greater China at CB Richard Ellis (CBG.NYSE) Residential. "The main thing they’re trying to accomplish is to provide more reasonably-priced accommodation, because at present the private sector is not providing it."

For years China’s public housing programs have been neglected, as local governments lacked both political incentives and funding. Only two-thirds of last year’s planned 3.1 million new units were actually built, according to the World Bank. Meanwhile, corruption (such as granting affordable housing units to government officials) has been commonplace.

Local governments have also been reluctant to allocate plots of land for economically affordable housing, largely because they lose out on land sales income – which make up anywhere from 18-29% of their revenues, Eilers said.

"There is a disconnect between the aims of the central government – which wants to give away land supply for low-income housing – and the aims of the local government, which depends on local land revenues," he said.

Returns

Neither is it surprising that developers would be more interested in the luxury real estate market. Margins for upscale real estate can be as much as 22-23%, versus less than 5% for developing affordable housing.

Things may be changing. With Vice Premier Li Keqiang – favorite to succeed China’s Premier Wen Jiabao – lending the scheme high-profile backing, social housing has been put at the front and center of housing policy. In May, Beijing told local officials that affordable housing would be part of their performance appraisals.

There may be more of a concerted effort on the part of developers, too. "If you’re a large national developer like Vanke (000002.SZ) or Greentown (3900.HK), you want to participate and show support for the nation’s development," Eilers said. "Some developers are building low-income housing to maintain good relations with the local city government, and also for corporate social responsibility reasons."

The right substitute

Jing Ulrich, managing director and chairman of China equities and commodities at JP Morgan (JPM.NYSE), argues that although these projects seem less profitable for developers, they can be built quickly and cheaply, and sold without risk because the government distributes the properties.

New modes of funding (including build-transfer agreements between construction companies and local government, real estate investment trusts, insurance funds and the use of local housing provident funds) will help cities achieve official targets for social housing better than in the past, Ulrich said.

The central government has budgeted US$9.3 billion for investment in affordable housing, of which US$9.1 billion will be transfer payments to local authorities. Local governments will bear the majority of the funding burden, however, as some analysts estimate that construction of low-rent housing alone will require as much as US$66 billion in 2010. As such, some regions with higher fiscal deficits and a heavy financing burden for infrastructure projects may lag behind.

On a broader level, the introduction of so much new affordable housing might also help cool prices in the property market as a whole.

"The government doesn’t need to introduce additional tightening measures to bring down property prices if supply increases, especially in low-end housing," Ulrich said. "The average prices of housing will naturally come down."

But Robert Fong, director of international product and business development at China Real Estate Information Corporation (CRIC.NASDAQ) is more skeptical. Though a jump in the number of affordable homes may help soothe income disparity worries, there may not be the same balancing effect on the property market.

"Typically, only when the market is going through a trough and the pricing of units is depressed can low-income housing can act as a substitute," Fong said. "That’s not the case in China right now."