The authorities are trying
to discipline the housing market and sort out real estate’s relations with the banks.
However, it is unclear whether these actions will divert activity towards the mass housing
The real estate industry encapsulates the transitional state of the
Chinese economy – structurally distorted and unbalanced by the pressures of over-rapid
expansion. What is more, the way the author-ities try to address problems in the sector is
illustrative of the government’s general poli-cy approach almost 25 years into its pro-
gramme of economic reform, which might be characterised as half-hearted intervention. It
wants to respect markets, but it cannot leave them alone.
With real estate. this is
because the sector plays a unique role in the country’s develop-ment and in the lives of its
population. It con-tributes an estimated 2.0-2.5 per cent to annual GDP growth. At a time of
rising unemployment, the construction industry is a source of many jobs. Housing has a
direct bearing on quality of life and is a hallmark of prosperity among an expanding
propertied class. The health of the property market is also crucial to the financial sector,
which advances capital to developers and loans to purchasers. Despite its importance,
however, forces in real estate pull in different direc-tions, which means that the government
must be circumspect in the way it exerts control.
Recently. the government has
become increasingly concerned by the rapid expansion of the upper-end of the housing
market and the rise in prices at the middle to low-end. Price inflation on an average
property was 9 per cent year-on-year in January-May 2003.
Real estate is sucking
in increasing volumes of capital, with investment surging by one-third in January-March. to
Developers have concentrated on luxury accommodation, where
margins are widest, supported by the banks, which want their share of a lucrative market.
Demand is strongest, however, lower down the residen-tial property line. As individual
incomes continue to grow, more and more people are looking to buy property. There is also
strong investment and speculative interest because of the rise in prices and the dearth of
savings and investment opportunities in China. The regeneration of city centres and the
rolling out of new infrastructure is pushing urban populations to new suburbs further
stimulat-ing the demand for non-luxury housing.
Increase in interest
The government now worries that the top end of the market is taking too large
a pro-portion of real estate investment, which is fuelling a glut. A late 2002 ban on new land
leases for villas slowed the market to some extent. However, there was a 9 per cent rise in
unsold apartments in January-May this year, which suggested that the housing sector
might still be running the risk of eventual collapse. On June 13, the People’s Bank of China
(PBOC) responded with a directive that interest rates on luxury properties should be raised.
Mortgage rates for commercial housing were to be maintained at levels that would continue
to stimulate this segment of the market. Minimum down-payment thresh olds of 20 per cent
for first house purchases would not change, but higher levels would be set for subsequent
purchases. Mortgages would only be advanced for completed properties, not where work
was still in progress.
State-owned property developers may not -be happy with the
new constraints, but they will live with them. Kate MeMurtrie-Poul-ton, director of corporate
real estate services -in Europe and Asia for Chesterton Intenia-tional, reckons that most
developers recognise the long-term benefits for the sector, even if the situation over the
short-term is complicated by the PBOC’s actions. She is gene rally positive about the
pressure being -exerted on the sector and on banks (see -below). saying it should
encourage greater transparency and open opportunities for for-eign entrants. Michael Hart,
senior research manager for Jones Lang LaSalle in Shanghai, notes that local PBOC
branches may have some latitude in the way they interpret the new guidelines. Conditions
vary from place to place. so that it would indeed make sense not to apinly inflexible rules to
Failure to Consult the industry
To the extent that the new
restrictions are intended to encourage better lending prac-tices, they must be a good thing.
There have been dissenting voices, howevei’. Pan Shiyu. -chairman of real estate
developer Soho China. is reported to have been unhappy about the failure of the authorities
to consult the industry before issuing the directive; he would have welcomed the opportunity
to put -across his view that the new restrictions were unnecessary. Pan is a private
developer and this sector has generally found it hard to secure bank credit and has relied
on pre-com-pletion sales as one means of making up capital
Notwithstanding the need to correct imbalances in the residential
property mar-ket. the government’s chief concern may actually have been the exposure of
China’s state-owned banks to developers and top-end -purchasers. The government has
struggled to turn the big four banks into credible and competitive institutions. Some
Yn1,400bn in non-performing loans NPLs) – well short of the total understood to be on the
banks’ -books – were transferred to asset manage-ment companies in 1999. But the
banks have continued to accumulate NPLs since, many from real estate.
is unsustainable. At the end of April. China’s banks were
Ynl,836bn in outstanding loans to the real
estate sector, just under 18 per cent of their total loan portfolios. The banks are bush with
cash deposits. and the rate of advances has been rising. Between January and May,
Yn19.7bn was extended to property devel-opers, which was ~ I per cent more than dur-ing
the same five-month period in 2002.
The risk for banks is not confined to
developers. At the end of April. outstanding personal loans for housing were Yn924.6bn, or
8.9 per cent of total bank loans. Although viewed as a relatively safe business for the
banks, most of these loans were extended in the past two to three years. and have not run
a long enough course for borrowers to estab-lish reliable credit records or for lenders to
project the cost of defaults. In addition to an estimated 10 per cent of loans that are granted
in defiance of regulations, a further amount relating to the real estate sector will therefore
represent high, but concealed risk Malpractice. miscon-duct, embezzlement, corruption
and fraud have com-pounded problems at China’s banks, and high-lighted the danger of
over- close relations between developers, bankers and local government officials. While
the central government can only put pressure on the banks to improve their procedures for
credit assessment and risk management, here it intervenes directly and forcefully to break
down overlapping interests. Property magnate Zhou Zhengyi and former head of the Bank
of China in Shanghai and Hong Kong, Liu Jinbao, are under investigation. The authorities
are also trying to clear tip corruption cases in Wen-thou, the city pioneering liberal banking
reforms, and Hangzhou. involving the alleged cheap sell-off of land by officials for personal
gain. The government now insists on public land auctions to replace tendered bids, which
officials could circumvent for their own ends.
Shanghai is at the centre of the
current clampdown, with land transactions there under review. In the first five months of this
year, the property sector accounted for near-ly 20 per cent of all bank lending to compa-
nies. However, similar problems charac-tense relations between developers and bank and
local government officials across China. The temptations and rewards are bigger in the
larger cities. Audits at the major banks have exposed extensive abuse. The cosy
relationships between individual companies and individual banks effectively freezes out the
competition. At the other extreme, pur-chasers may also be exploiting weaknesses in the
systems designed to steady the mar-ket, hiding multiple purchases or poor cred-it records,
or buying to sell on for profit.
It is far from clear that the PBOC’s new restrictions
will divert activity towards the mass housing market – as the government would like – a point
made in Jones Lang LaSalle’s June Shanghai Economic Insight analysis on the impact of
the directive. In Beijing, however, the real estate services company notes an increased
interest in mass housing and the possibility that incentives will be introduced to stimulate
this segment of the property market. The central govern-ment has earmarked Yn324bn for
the con-struction of housing for low- and middle-income households in 2003-04. But it
needs more developers to take an interest in afford-able housing.
Price remains a
sticking point. In March, Shanghai mayor Han Zheng said the city government would aim for
Yn3,000-4,OOO per sq metre, which still seems high to be widely affordable. The central
government would like to see properties selling at under
Yn3,000 in a city like
Shanghai, where most properties fetch over Yn3,500. There is very little new property in
Beijing for under Yn4,000, while Yn3,000 is roughly the lower limit in
The struggle to get fami-lies into housing is matched by the need to
increase per capita living space. which currently stands at close to 22 sq metres for urban
resi-dents. Impoverished resi-dents have as little as a quarter of this
Developers’ ability to source their capital requirements from elsewhere may
also take the edge off any incentive to switch to the mass property market. Loans were
relatively easily to come by.
They may now rely increasingly on inter-nal funding.
novel channels such as real estate trusts, or more creative borrowing and the discretc (mis)
application of finance, where they can get it. With Zhou Zhengyi’s predicament in mind,
however, they will be careful not to cross the authorities, by stretching rules to their