Recent evidence suggests that buyers are beginning to take advantage of a perceived lull in the market to snap up new properties in Shanghai where real estate prices have dropped 15-20% from the first quarter.
The tightening policies in June resulted in a sharp decrease in transaction volume. In May, the transaction volume was 35% that of March, while June saw an insignificant recovery.
Anecdotal evidence, which sometimes reveals more than the statistics, suggests that prices of city center apartments fell by an almost immediate 10-15% on the secondary market. The speed of the decline reflects the market's liquidity and the supply-driven nature of an emerging market.
Statistics provided by the Greenland Group reveal that their sales volume fell by 60- 70% from March to June 2005. Despite the slowing sales rates, major developers are resisting price-cutting with most taking a wait-and-see attitude, while a few are offering lower prices to stimulate demand. Many are now asking the tougher questions, such as which market niche to target, where to build and what the future price trends will be.
Signs of life
Given the likely gradual relaxation of lending policies and a dearth of alternative investment opportunities, the long-term future of the market is not in question. As has already been seen, buyer interest is returning, especially among owner-occupiers and new investors. New downtown properties that once fetched RMB30,000 to 35,000 per sq m. have seen their prices drop 15% to RMB25,000-30,000 per sq m. The latest two projects on Nanjing Road have been fully sold out, and in some areas, there has been a bounce from the quick fall in June and July has even been seen, but this appears only to be a bounce in the asking prices offered by individual landlords willing to list their properties at prices that include all the additional taxes. Besides, the number of transactions at these levels is limited. The technical term for this is a 'dead cat bounce' and it is unsustainable. For the most part, developers with new projects coming to market have been holding back from marketing. Difficulty in selling may befall the new developments not in prime locations or those overly ambitious developer?s sales rates of below 30% in a project bite hard.
All is not lost in the residential market, however, and future demand for Shanghai housing is expected to be strong. Out of 4.86 million households in Shanghai, only 2.5 million have moved to new homes, the remainder living in government-subsidized housing by the end of 2004. Assuming a start point of 1998 when housing reform effectively began, we can expect most of the remainder to move over the next 10 years. At the same time, there is evidence to suggest that white-collar workers will upgrade quickly and increasing wealth among the young will encourage them to leave home at an earlier age than was the case 5 years ago. With foreign investment in Shanghai still increasing (see chart below) and the domestic economy strong, Shanghai's 'brain gain' means that some of the best educated and most ambitious young people from around the country will flock to the city in search of better paying jobs.
Since 2001, when land was in short supply, around 10 million sq m. of land has been approved for construction annually, which translates approximately into 285,000 units per year, based on an average plot ratio of 2. At this rate, it will take another eight to 10 years to resettle the remaining 2.36 million households. Not all households will move, of course, but the land supply can be expected to decrease further resulting in steady demand for new homes over an extended period, albeit at the lower end of the market.
Shanghai's increasingly cosmopolitan appeal is attracting more foreign residents to the city with a year-on-year increase of 32.1% in the number of new work permits issued in the first half of 2005 and a total of 41,290 foreigners working in the city. This doesn't count the Taiwanese, which number up to a half million in Shanghai by some estimates.
Smaller developers or the 'one hit wonders' with one or two projects in the pipeline that are dealing with delays in approvals, financing, and site clearance are going to be very stretched and vulnerable. Those with projects currently being marketed will have to make the difficult decision of whether to cut and run, upsetting those buyers that have already bought, or cross their fingers and hope for the best.
As purchases were delayed following the tightening measures, property agents were immediately affected. The first to feel the pinch were the smaller agencies with a total of 1,800 reportedly shutting up shop between March and July, which translates to an average of 30 agents closing their doors during March and April each day. Staff and salary cuts have followed, since the Shanghai government first introduced the relatively minor capital gains tax in March. Now, agency companies are moving from a long period of harvest and expansion to one of belt-tightening and contraction. Large agency companies will also be affected but may be better protected by the wider range of services they offer.
Meanwhile, the Shanghai real estate market has gone into a holding pattern with heat coming out at the speculative end of the market. This is the result Beijing sought, a testament to the effectiveness of their policies. In contrast, the local government does not want the inactivity to go on for too long. Significant fluctuations in real estate prices would adversely impact the long-term health of the market which will influence the entire city economy.
No more new tightening policies are expected unless property prices start to rise again in the short term. At the same time, no immediate relaxation of tax policies is expected but land supply constraints may be eased. Introduction of a fair tax structure and reasonable policies is the most effective way for the government to adjust the whole real estate market. The new tax regime will remain in place although there is a possibility of adjustment.
The next test for the market will come when pipeline projects come into the market in the next three to six months. At the same time a backlog of empty homes that has built up during three years of frenetic activity is being cleared by end users.
The foregoing opinions are those of Sam Crispin.