Property News Headline - Hong Kong
High-stakes balancing act
Thursday, 19 April 2012
Thursday, April 19, 2012
Despite reinforcing its stringent measures to cool the red hot property market, China maintains some leeway as it cannot afford to see a drastic slump.
For nearly two years, the country has imposed the strictest-ever curbs on the housing market - including restrictions on mortgage loans and purchases of second homes - in order to rein in soaring prices and maintain social stability.
The measures have been successful to some extent, as residential property prices fell more than 2 percent in March in the 10 biggest cities from a year ago, while home sales slumped 25 percent in the first two months year-on-year. On the downside, however, the continuous fall has weighed on some developers that are struggling for survival, including those filing for bankruptcy.
Alfred Lau, an analyst at Bank of Communications International, said a number of developers are likely to miss sales target this year, worsening their financial health. "Developers merely met 20 percent of their full-year sales target in the first quarter, compared with 25 to 30 percent in the same period in 2011," Lau said.
To boost sales, developers slashed flat prices by 12 percent on average last year, according to property research house World Union.
Independent economist Andy Xie Guozhong forecasts more restructuring in the property market in the years ahead.
"It is inevitable that small developers will be wiped out because of tightening measures," Xie said. "The real estate market will become heal
thier after 90 percent of the 20,000 developers shut down."
The property slowdown has also hit economic growth. Domestic output growth - normally heavily driven by the property sector - slowed for the fifth straight quarter in the first quarter to 8.1 percent, compared to 9.7 percent a year ago.
Therefore, about 17 local governments, in both first-tier and smaller cities, have implemented a series of loosening measures since the second half of last year to help prop up the market. Leading cities, including Beijing, Guangzhou and Shenzhen, have been discounting mortgage rates for first-time buyers - providing loans as low as 6 percent, compared with the typical current five-year mortgage rate of 7.05 percent.
Meanwhile, residents in cities such as Foshan, Wuhu and Shanghai are being allowed to buy a second flat.
Former People's Bank of China adviser Li Daokui warned that the real estate sector accounts for "the biggest uncertainties in the Chinese economy in 2012," as purchase restrictions do little but temporarily ease the buying frenzy.
China International Capital Corp analyst Eric Zhang Yu said Beijing kept "one eye closed" on whether local governments were executing curbs strictly, as long as there was neither high pressure from public opinion nor home price increases.
"We do believe that the central government has big concerns over the macro economy in 2012," Zhang said. "That is why they only care about big events like Foshan, Wuhu and Shanghai, but don't take local fine-tuning very seriously. As a result, we think loosening measures from local governments will come out slightly and mildly."
Economists call for more effective measures to adjust domestic property markets, with veteran independent real estate analyst Xu Zifang suggesting Beijing impose different guidelines for local administrations.
"Curbs should be strictly implemented in big cities, as they can afford to rely less on land revenue on their economic growth. But some loosening should be given to third- and fourth-tier cities to boost local output growth," Xu said.
Yi Xianrong, a senior researcher at the Chinese Academy of Social Sciences, suggested the central government replace purchase restrictions with property tax. Currently, property tax is being levied in Chongqing and Shanghai on a trial basis.
Back to developer woes - earlier this month, Hangzhou Glory Real Estate unsettled investors by ending up in loan default, following on the heels of another Hangzhou-based developer's bankruptcy in February.
Loan default concerns are resurfacing as debt levels at a number of mainland developers exceed cash flow.
Hong Kong-listed Hopson Development (0754), which had cash of HK$2.62 billion as of December 31, has debts of HK$15.3 billion due by the end of this year, according to its annual financial results announcement.
Its gearing ratio jumped to 72 percent last year, from 51 percent in 2010.
Glorious Property Holdings (0845) has 9.3 billion yuan (HK$11.45 billion) debt due this year - more than nine times its net cash of one billion yuan.
Debts at Coastal Greenland (1124) and Mingfa Group (International) Co (0864) exceed cash flow by nearly three times this year.
Meanwhile, foreign direct investment in the mainland's property sector dropped 6.3 percent in the first quarter - compared with a 38.6 percent gain in the same period the previous year.