Keeping it real

To hear reports about the Chinese residential property market in January and February, one would think that it was on its last legs. Stories were rife about real estate agents in Beijing and Shenzhen closing branches in response to slow sales. Inevitably this escalated into talk of a bursting of the Chinese property bubble.

The corrections in Shenzhen were substantial. The Shenzhen Municipal Bureau of Land Sources and Housing Development was quoted as saying that between October and November 2007, home prices in the city declined by more than 13%. Monthly new apartment sales, meanwhile, fell more than three-quarters from January 2007 to November.

But to long-term observers of property in China, the recent drop in prices was less alarming.

“It’s actually just a few cities seeing rather big price corrections,” said Nicole Wong, an analyst with Hong Kong-based brokerage CLSA.

For Wong, the drop in Shenzhen is a repeat of a familiar pattern. When speculators drove up prices of high-end property in Shanghai several years ago, the city experienced a correction that lasted from 2005 to 2007. Residential property prices continued to grow, but at a reduced rate.

In both Shanghai and Shenzhen, speculation was blamed for prices driven through the roof. Shenzhen, for example, has a relatively simple regulatory environment that is conducive to flipping property – buying and quickly reselling for profit. As a result, speculators made up 70% of buyers at one point last year.  
“In Shenzhen, reselling in the secondary market is easier, more like Hong Kong – a freer market,” Wong said.

Stopping speculation

In 2006, the central government intervened following rising discontent over increasingly unaffordable housing. Foreign investors, small in number but high in profile, were a ripe target. Residency requirements, part of a package of measures introduced in July 2006, were specifically designed to curb foreign speculation.

However, rapid rises in markets like Shenzhen and Guangzhou suggested the new rules were ineffective, so the authorities came up with fresh tactics. A series of tightening measures such as interest rate hikes have since proved more potent.

“It’s more difficult now to get bank loans with the central bank restricting credit, and people think interest rates are very high,” said Chen Jiamin, an agent at Shenzhen Xinyuan Real Estate Agency.

Retained strength

Outside of Shenzhen, less speculation has meant less of an impact from the new capital restrictions. The consultancy Vigers reported a “softerning” of the Beijing residential property market from October 2007 but said strong demand, particularly in the luxury segment, ensured prices remained firm overall.

Luxury properties in Shanghai have also remained largely unscathed, according to Guo Qingsong of Shanghai Wanzhi Real Estate Agency. This view is backed up by research from property consultancy Jones Lang LaSalle, which pointed to continued optimism and strong demand in the luxury segment during the final quarter of 2007.

The differences between Shenzhen and Shanghai highlight the folly of generalizing investment trends in China’s real estate industry.  
“[Unlike Shenzhen,] in most cities people are either buying for themselves or they are in rather cash-rich positions and they need to park their cash [in property],” Wong said.

A state directive in 2006 to encourage the building of affordable housing is having a second, unintended effect, Wong added. The policy requires that 70% of housing development in cities must comprise units of under 90 square meters. This is supposed to shift supply away from the market’s high end and toward the mid- to lower-end. However, it has also served to push up high-end prices even where demand has slowed, as in Beijing.

Despite credit tightening and the recent volatility in Shenzhen, real estate will remain a strong draw for buyers and investors in China. To agents like Guo, it remains a less risky, but still profitable, alternative to domestic stocks.

“I think real estate is the best investment product,” he said. “Government control won’t have a long-term impact on the market.”