If the Beijing leadership could pick one part of the economy to revive through its various stimulus efforts, it may well be property. Real estate accounts for about a quarter of China’s fixed-asset investment and its effects are felt all the way along the industrial supply chain from steel to cement.
"Chinese property is the pillar industry of national economy," said Pan Shiyi, CEO of developer Soho China, responding to CHINA ECONOMIC REVIEW’S questions via his blog.
"Once policies take effect, the property sector will, to some extent, steer China’s economy out of trouble against a background of global turmoil."
Beijing’s US$586 billion stimulus package includes more than US$40 billion for affordable mass-market housing over two years, but this alone will not be enough to turn around the sector. In 2007, total investment in affordable housing came to US$12.1 billion, or just 5% of total residential investment, according to UBS, an investment bank.
If the government wants to revive the residential real estate sector, it needs to convince private developers and investors to get back on board.
"You need to reverse the plans of developers who up to November had been putting projects on hold," said Michael Klibaner, national director and head of research at property consultancy Jones Lang LaSalle in Shanghai. "Once they are comfortable with demand being out there and transaction volumes going up, they can get projects going again."
In addition to the swathe of postponements, house prices rose by just 1.6% year-on-year in October, down from 3.5% in September and 11.3% in January, according to the National Development and Reform Commission.
Beijing is already using monetary policy to try and reinvigorate the sector, as well as measures targeting first-home buyers. At the end of October, minimum down payments were cut to 20% from 30% and the discount on mortgage rates was doubled to 30%. Several property-related taxes have since been waived or reduced.
Klibaner links rising affordability to rising transaction volumes in some cities. "Prices are still falling but the fact that transactions are happening is important. I am reluctant to put a date on [a recovery], but in the next six months I wouldn’t be surprised to see it."
Carol Wu, a property analyst with DBS Vickers, puts the strong transaction data down to a surge in affordable housing deals, with little action in more lucrative segments. She doesn’t expect a recovery before the end of 2009. Kaven Tsang, who covers property for Moody’s, believes the next 12 to 18 months will be volatile, with a question mark over developers’ ability to get funding.
Aside from local-level policies, analysts expect a further unwinding of market cooling measures imposed in recent years. In mid-December, Beijing announced more transaction tax cuts as well as measures to encourage bank lending to the property sector. Down payments on certain kinds of second-home mortgages were also lowered from 40% to 20% and interest rate discounts were increased.
"The market cannot rely on first- home buyers," said Wu. "Upgraders and investors must come back too."
The long view
Meanwhile, developers who can absorb the current pressure and focus on the long term remain bullish.
"China’s fundamentals are strong with a growing middle class, increasing disposable income driving consumption, as well as rapid urbanization, all of which are key drivers for real estate demand," said Lim Ming Yan, CEO of CapitaLand China.
Companies to watch: China Overseas Land (0688.HK) and China Res Land (1109.HK), which have diversified portfolios, will fare well. Firms with high gearing ratios and bulging land banks – Greentown China (3900.HK), Country Garden (2007.HK) – will face liquidity problems.