17 May 2012
Greater China Property market report
Home prices and sales drop amid strict policies
The combined effects of stringent housing regulations and the sovereign debt crises in Europe and the US, during the traditional low season of Chinese New Year, led to a drop in the volume of home-sale transactions, with Mainland residents preferring to adopt a wait-andsee attitude.
According to China’s National Bureau of Statistics, the total transacted area of residential units dropped for two consecutive quarters across the country. Although the central bank’s reduction of the required reserve ratio by 0.5 percentage points to 20.5% in February aroused market expectations of credit loosening, we do not expect market sentiment to improve under the current strict regulatory environment. At the same time, inventory in major cities remained at high levels, while developers are suffering from a severe lack of capital. If sales remain weak in the second quarter and banks do not relax credit, developers will face increased funding pressure and will have to cut prices to boost sales or sell projects to other companies in an attempt to reduce their debt ratios. Small to medium-sized developers which are poorly managed may find themselves exposed to the threat of mergers and acquisitions or liquidation.
In the first quarter of 2012, the performance of Shanghai’s luxury residential market was sluggish, with the average home price falling to RMB48,660 per sq m. However, some developers performed well as they cut prices in order to retrieve capital.
Meanwhile, the luxury leasing market was strong. The average monthly rent rose 3.5% quarter on quarter to RMB 171.2 per sq m, while occupancy rates remained at 88.5%.
In the first quarter, the Shanghai government clarified that the term ‘local family households’ excludes non-local families who have held residence permits for over three years, meaning that nonlocal families cannot purchase second homes. Home purchase restrictions, which are unlikely to relax, will continue to suppress housing demand. Meanwhile, amid decreased sales, developers will extend their price-cut strategy. We therefore expect prices in the luxury residential sector to continue to drop.
During the traditional low season of Chinese New Year, only two projects received presale consent in the first quarter, providing a total of 96 luxury units in Beijing. 416 primary luxury units were transacted in the quarter, a 36% quarteron- quarter decrease and a new low since the financial crisis in 2008. Prices also dropped 1.2% from the previous quarter. On the leasing front, the vacancy rate edged up 0.5 percentage point to 13.5%. The debt crises in Europe and the US have forced many multinational firms and institutions to reduce their number of expatriate staff and accommodation budgets. Demand from expatriates fell and the average monthly rent of luxury projects dropped 1.6% quarter on quarter to RMB143.9 per sq m.
The supply and sales of primary luxury residential projects are expected to rebound in the second quarter. However, under the current regulatory measures— Home prices and sales drop amid strict policies which are unlikely to be relaxed—nonlocals will still require five-year’s tax and social security proof to buy homes in the city. Meanwhile, the property tax— already implemented in Shanghai and Chongqing—is likely to be extended to other cities. In the coming year, supply and sales are expected to remain at low levels, while prices will continue to fall. Performance in the leasing market will improve with rents remaining stable during peak seasons, despite weaker demand from expatriates.
Guangzhou’s luxury residential market was quiet in the first quarter. Though the supply of luxury residential projects increased 13.4% from the previous quarter, transaction volume fell 39.3%, due to weak market demand. Luxury home prices dropped 0.4% quarter on quarter to RMB30,100 per sq m in the first quarter, while the average monthly rent rose 2.0%.
Despite the government’s emphasis on the continued implementation of curbing measures, some details of the measures were relaxed. Since the end of Chinese New Year, some banks have reduced the mortgage rate of first homes to 85% of the benchmark lending rate. This relaxation of mortgage loans is expected to stimulate housing transactions.
In the second quarter, some large luxury projects will come online. However, the residential market will still be largely affected by regulatory policies. Inventory had reached a relatively high level of 14 million sq m. If the sales pace continues as it had over the past year, it will take almost three years for this inventory to be absorbed. With a combination of slower economic growth, we expect overall residential prices in Guangzhou to drop a further 10%. In the luxury sector, we do not expect a significant price decrease, due to the shortage of luxury projects.