City&Country: Offshore-- Renminbi’s rise spurs property boom for China’s new rich

Make small talk with someone in China and eventually the topic will get around to property.

“It may be a good time to buy property in the next few months,” says Miffy Li, a 27-year-old yoga teacher, sipping her tea in a coffee shop at a five-star Bei­jing hotel. “The consolidation in the market will not last long. Property prices may pick up at the end of this year.”

Li knows what she is talking about — she is a mini-property mogul in the making and owns six flats and a shop. The mainland property market fell into its third consolidation in five years after the government took steps in April to curb property speculation. However, many people doubt the downturn will last long and believe that a sharp rise in prices lies ahead.

For investors like Li, that would be good news. She has to make mortgage payments totalling more than RMB100,000 a month. “I come from a business family; we have clubs in Hebei,” she says. “My husband is also a businessman.”

After moving with her family to Beijing from Hebei, she bought her first flat in the capital in 2007. The unit — where the family lives — is located in a luxury housing estate near the core business district. The 410 sq m (4,413 sq ft) flat cost her RMB11.07 million. It has since increased in value to at least RMB20.5 million or RMB50,000 psm. “The price of my flat surged substantially in the short term, and that convinced me that property can also be a good investment,” Li says.

In early 2008, property sales and prices dropped 40% and 14% respectively in Beijing after a new round of austerity measures was released at the end of the previous year. For Li, it was the perfect time to buy her first investment property.

She paid about RMB2.02 million for a 112 sq m flat at R&F City, a middle-class housing estate in the East 3rd Ring Road Middle area. Last July, she sold it for RMB3.36 million, two-thirds more than what it had cost her 16 months earlier.

The attractive profit margin encouraged her to extend her investments in property further. Early last year, Li bought a 200 sq m retail shop in an urban area for RMB6.6 million, generating a rental income of RMB850,000 a year. The shop is now worth RMB9.4 million.

“At first, I hesitated to buy another flat, as property prices had risen to such a high level, but the property agent encouraged me, saying prices would rise further,” she says.

She bought two more flats at R&F City for a total of RMB7.19 million. They are now worth RMB10.53 million. Despite the government’s measures to cool the market, she believes a sharp price fall at R&F City is unlikely to happen anytime soon. “The project is located in the CBD and is close to the Beijing subway; prices must go up sooner or later,” she says.

Investors optimistic
As property prices remain buoyant despite the best efforts of the government, Li and other investors are convinced that the market is headed for even better times.

“The main driver for continuous growth in property prices is strong demand,” says David Ng, head of regional property research at Royal Bank of Scotland. “The mainland is experiencing rapid economic growth. When they have five-year development guidelines and invest heavily in infrastructure, how can mainlanders be not bullish on property prices?”

The Hurun Report says there were 875,000 mainland residents with personal wealth over RMB10 million at the end of last year, 6.1% more than a year earlier. The number with personal wealth of more than RMB100 million grew 7.8% to 55,000 in the same period.

Li is one of the growing band of wealthy comrades. Lots of people gazed at her with admiration when she bustled into the coffee shop with her Chanel handbag, a brand-new Apple iPad and an iPhone with a red crystal case. She leased a flat in The Arch at Kowloon Station, one of Hong Kong’s most luxurious housing estates, for three months after giving birth to her baby girl in the city four years ago. In her eyes, property investment is relatively reliable.

“My friend suggested I buy antiques for investment, instead of property. But I’m worried that it is difficult to identify a real antique,” she says.

Wang Ren, an analyst at CCB International Securities, says housing demand will continue to increase with rising incomes, a growing population and fast urbanisation.

The official China City Development Report showed last month that 46.59% of the country had been urbanised by the end of last year, compared with 42.99% four years ago. So, the mainland’s urbanised area has grown at an average annual rate of 2%.

Property prices in the suburbs of first-tier cities will show strong growth as infrastructure and transport improve, Wang says.

“Many people in rural areas move to the 20 major cities looking for jobs, better medical care and education, driving up the property prices in the major cities,” he says.

Wang Hong, an associate professor of real estate and finance at Tsinghua University in Beijing, says many mainlanders, particularly those from a rural background, believe people should own property. “Their children have to get a property if they want to get married,” he says. But many have had to put their plans on hold as property prices soared beyond their reach.

To ease the social discontent caused by skyrocketing property prices, the central government has ordered local governments to increase land supply 135% to 180,000ha this year. Local governments have also been told to build more subsidised and budget housing for low-income groups this year.

Officials’ interests
But helping to make buying a home easier is not something that is high on the agenda of local officials, whose promotion is often tied to boosting economic growth through showcase development projects. “[Budget housing] is not what local governments and officials want to do, as it is not profitable,” CCB International’s Wang says. “We will see governments sell residential sites at high prices again after the cooling measures are relaxed, unless they change the rules of the game.”

Wang Hong of Tsinghua University says most officials stay in a city for three to five years, and their promotion depends on their work there. “The fastest way to show their ‘ability’ is to achieve higher GDP growth and give a facelift to the city through investment or developing infrastructure,” he says. “The investment cost for infrastructure development is huge. Where does the money come from? Selling sites.”
Local government revenues are heavily reliant on land sales, with about 40% on average coming from property deals. In first-tier cities such as Shanghai and Beijing, that figure reaches 50% to 60%, according to RBS.

Ng says local governments also raise money from banks by mortgaging sites that are to be auctioned.
“The central government should offer incentives to the local government officials to build subsidised housing,” says CCB International’s Wang. “Their promotion should not depend on GDP growth and a financial surplus only.”

State-owned enterprises have been the most aggressive bidders at land auctions since 4Q2009. Many sites have been sold at record prices, which has supported property prices further.

“[State-owned enterprises] are cash-rich, and it is easier to get financing from the banks because of their state-owned background. That has helped to form the bubble in the property market,” says Tsinghua University’s Wang.

Meanwhile, investor Li’s assets in Beijing have grown 63% to RMB43.79 million in three years. However, all her properties are mortgaged, with the down payments ranging from 30% to 50%.

“I don’t want to put all the money into one property, because the funds would be locked in,” she says. “I would rather mortgage the property and diversify my money among different properties. And the banks have encouraged us to borrow.”

While banks were ordered in 2008 to tighten lending, one property agent says the policy was never executed, as banks relied on the interest income.

The China Banking Regulatory Commission negotiated with the banks for a proposal that, on the one hand, would not affect their interests but, on the other hand, would ease the social discontent, he says.
“Even though the banks were ordered to tighten the availability of mortgages again last month, many small banks are still willing to offer mortgages for buying second or third homes,” according to the agent.

Outstanding housing mortgage loans stood at RMB5,354 billion at end-March, about 13% of total lending. It is not the biggest part of their business for banks, as loans to small and medium-sized enterprises and for infrastructure projects account for more.

Wang at CCB International says, however, that the property market is playing an increasingly major role. About 15% of the mainland’s GDP last year was generated by property sales, and 5.3% by land sales. He says: “The performance of the property market affects raw materials, steel, cement, electronic appliances and banks — that’s why no one believes the government will hit the property market too badly.”

So, investors like Li bide their time, waiting for a drop in prices to give them a chance to buy more property. — SCMP

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 813, July 5-11, 2010

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