During a panel discussion at the Wharton Global Alumni Forum in Beijing titled, “Boom and Bust in the Chinese Real Estate Industry,” several Chinese developers were upbeat about the prospects for China’s residential real estate industry during the next decade. Counter-intuitive though it may seem, the impact of the global financial crisis on China’s real estate market has been positive, some panelists said.
In the wake of the U.S.-led global economic downturn, officials in Beijing loosened restrictions on property buyers and developers, fueling the market and allowing it to resist the downturn, said panelist Zhou Xin, chairman and CEO of E-House (China) Holdings Limited, a Shanghai-based, New York Stock Exchange-listed real estate brokerage company.
Several other factors have contributed to the growth of China’s residential real estate sector, said the panelists. These include tight banking regulations that have restricted the ability of developers to secure the excessively easy loans that led to over-building elsewhere; steadily increasing consumer demand driven by rising incomes; ongoing urbanization; and intense cultural pressures supporting home ownership.
Limited Impact
The impact of the global financial crisis on China’s real estate market has so far been very limited, said Zhou. In fact, he said, China’s real estate industry has actually been rescued by the crisis.
During the discussion, the five-person panel, which featured Zhou and four other China-based developers, expressed optimism about the future of the industry, which is due in part to the unique characteristics of China’s real estate market.
Li Sze Lim, chairman of Guangzhou-based developer R&F Properties, said China’s real estate industry is in a safe position compared with its Western counterparts. One reason, according to Li: Gaining project approval by developers from banks is much more rigorous in China than elsewhere. “Before issuing a credit to the developer, all of the banks in China will ask for four licenses, including the last one, the construction license,” said Li. “That means that from the time you buy the land, then start planning, and then go through other procedures, and then obtain the construction license and the others – which takes a couple of years – only then will you be qualified to borrow the money from the bank.” After that, once a developer starts selling houses, “you have to put all that money into one monitored account, and the money can’t be transferred,” Li continued. “That’s why most of the real estate projects in China were in a relatively safe position when hit by the global financial crisis.”
It is widely understood that China’s real estate market was under pressure in late 2007 and the first half of 2008 due to government market-control policies. Those tightening policies included higher interest rates for homebuyers and developers, while some measures were aimed directly at residential property buyers, such as higher down payments required for property purchases, and new transaction taxes for properties held less than five years. Other measures were aimed at developers. For example, the government lowered plot ratios for inner city areas, which meant developers couldn’t build as many units on a plot of land, and it prohibited trading in unbuilt units, so that both developers and buyers must wait longer for a return on investment.
Those measures cooled the market noticeably for a period. But in the wake of the global downturn, the government reversed some of the measures to promote growth. In particular, a looser monetary policy and lower interest rates injected liquidity into the market, boosting demand and supply.
“The market-control policies made it very difficult for real estate companies in China, but because of the financial crisis, China’s government has changed its macro policy from controlling the overheated economy to ensuring economic growth,” said Zhou. “And many real estate companies that were suffering during the difficult time early last year have managed to survive today just because of the global financial crisis. My view is that China’s real estate industry has actually been rescued by the financial crisis.”
But Zhou acknowledged that the crisis has negatively impacted high-end commercial properties and office buildings, especially in major cities. “The high-end commercial properties and office buildings have not recovered yet,” he said. “On the other hand, 70- to 90-square meter residential property sales have picked up noticeably, and that brings energy into the whole industry. My view is that the mass market for residential property is coming back.”
Zhou is confident that the stable growth will continue. Given that government policy plays a vital role in the industry, and that China’s official policy shifted to “ensuring growth” last summer, then “so long as other industry dynamics, including the professionalism of the developers, efficient supply chains and consumer demand are all in good shape, the market will be mainly driven by policy.” Zhou said. “And if the policy shifts a little bit, the market will recover, and that is indeed happening now.”
Growing Domestic Demand
The rapid urbanization of China and unique cultural pressures that have created inelastic demand for residential real estate have also helped fuel the optimism of the five panelists.
Feng Lun, chairman of Beijing-based Vantone Real Estate, one of the top 10 listed real estate companies in China measured by market value, said that the industry will ultimately be driven by residential housing. Today China’s real estate market is valued at around 3 trillion yuan, with two-thirds of it in residential property.
“My view is that until China’s average GDP per capita reaches US$8,000, which will take another decade, residential property will be the major product in China’s real estate market,” said Feng. “That could also explain why Vanke, the biggest real estate company in China, became the biggest residential property company in the world starting two years ago. I believe in the next 10 years, the biggest residential property companies in the world will all be Chinese companies.”
Ronnie C. Chan, chairman of the Hang Lung Group and its subsidiary Hang Lung Properties, both of which are listed on Hongkong’s Hang Seng index, said that in China, about 85% of people own property, and he added that trading volumes between owners will be enormous as well. “I believe not only in the next 10 years, but even in the next 20 to 50 years, the market will be huge,” says Chan.
Wu Po Sum, chairman of Zhengzhou-based Central China Real Estate, said the rapid urbanization of China will play a major role in the future of the industry. “My company is based in Henan province in central China, which has a population of 100 million,” said Wu. “Our strategy will be based on these 100 million people. We know that before 2020, the urbanization rate of China will reach 55%. In Henan province alone, it will reach 50% by that time.”
At present, only 38% of Henan is urbanized, said Wu, and he believes that it will grow at least 1% per year for the next decade. “This means that in Henan province, more than one million people will move from rural areas to the cities every year. If every one needs 15 square meters to live, the demand from these new immigrants will be 15 million square meters per year.”
In addition, he said, current urban residents will wish to upgrade their residences. “There are already 30 million urban residents today, and if we assume that every one of them will need one more square meter every year, that will be 30 million square meters every year, and if we add them up, in Henan province alone, there will be demand for more than 40 million square meters in the residential market.”
Henan province, he said, accounts for only one-thirteenth of the area of China, so the country as a whole will generate demand of around 600 to 700 million square meters in residential property per year. The experience of Western countries indicates that demand for residential housing only levels off when average per capita GDP reaches US$13,000 to US$15,000, and China is not expected to reach that for 15 to 20 years. “So I believe in the next one to two decades, residential real estate will be a morning-sun industry in China,” Wu said.
The panelists also pointed to China’s unique culture as another catalyst for the residential real estate industry. Feng, of Vantone Real Estate, said that China’s family culture plays a vital role in the industry. “When one young couple buys an apartment, the four parents might all give money to help pay for it,” he said. “And China’s one-child policy has promoted this phenomenon, because if the child’s own income is not enough to pay for the house, his parents and grandparents will help pay for it.”
This observation was echoed by Zhou of E-House Holdings, who said that China has a huge potential residential property market. Younger Chinese have proven to be very bold consumers. “In China, it is very important to buy an apartment if you are going to get married – this is a big issue,” he said. Zhou added that relatives of the couple often help make down payments for the apartment. In the U.S., while baby boomer parents also sometimes help with down payments, most young couples obtain loans from a bank.
Future Expectations
Because the market is largely domestic, it is well insulated from the global downturn, the speakers noted. Feng said that foreign investment in the domestic real estate industry is estimated at around 100 billion yuan, a relatively small portion of the total 3 trillion yuan real estate market. “In the future, the market will be mainly driven by effective real demand and by increasing incomes, so I am very confident about the market. In addition, the relaxed credit environment has helped to drive up real estate investment.”
However, the extent of government involvement in the market should not be underestimated, said Wu Po Sum of Central China Real Estate. Wu cautioned foreign observers not to ignore the “policy-guided” nature of the market, and warned them not to assume that the market is based on economic principles. “Government policy has a great impact on the ups and downs of the industry,” he said. “For regulators, when a certain economic issue gets hot, it becomes a social issue, and it might then become a political issue, which results in subsequent government policies.” You can’t simply analyze China’s real estate market from a supply and demand point of view. “You also have to look at it [as] a social issue that affects many people.”
Asked to compare the markets in China with those of Taiwan and Hongkong, Ronnie Chan of Hang Lung Group noted that mainland China is definitely the future, where prices remain inexpensive compared with other countries.
Li Sze Lim of R&F Properties echoed that comment. “I think China’s real estate market is still in its beginning stages,” he said. “For example, Shanghai and Beijing are now major global cities, but their real estate prices are much lower than cities like Tokyo, New York and others, which means there is room to grow.”
Because of the unique variables that affect China’s real estate market, which include the extent of government involvement, the social pressure to buy an apartment, and the limited supply of high-end properties, it is useful to analyze the market according to different segments, said Feng of Vantone. “The low-end market is managed by the government, and the government has a residential department to ensure that the lowest income people have places to live,” he said.
The mid-level market, typified by family members helping to buy apartments for young couples, Feng described as having non-elastic demand because the couples essentially must buy an apartment due to the social pressure. “You can not wait for this. Business from this segment of population has the highest growth rate in China, although the housing price is not necessarily the highest.”
At the high end of the residential market, said Feng, limited supply makes the market hard to gauge. “The high-end market has not dropped drastically, because the supply in this market is relatively small,” he said. “In addition, high-end properties have sold out in previous years, and the trading volume is small in the second-hand market, so it has less price sensitivity. But recently, in order to withstand the inflation cycle, some rich people have started to buy houses. Therefore, I think China’s high-end housing market is like a casino. There are some big winners, but it’s coincidental.”
