April 30, 2010 (Yantao Li) There has been a lot of news recently about the efforts by the Chinese government to cool-off the property market. The Shanghai Composite Index (SHA:000001) has fallen to record lows in 2010 as the government is cracking down on the sector. For this reason we're going to take a closer look at the sector, its size, key players, the presumed property bubble and its implications.
1978 marked a beginning of a new area in China in the property market - the first time commercial building was allowed since 1949. Over time China has developed a highly competitive real estate market. There are over 200 listed or non-listed real estate companies as well as many real estate service providers.
As illustrated by Figure 1, the real estate market in China has experienced a steady expansion throughout the last 8 years. On average, the year-on-year increase of total investment in real estate development is 21.68%.
Figure1 Total Investment in Real Estate Development nationwide, Source: National Bureau of Statistics of China
In 2009, the total investment in real estate development was 3,623.2 billion yuan ($529.78 billion), increased by 16.1 percent year-on-year. The total revenue of commercial buildings amounted to 4,399.5 billion yuan ($643.29 billion), up by 75.5 percent compared to that of 2008.
In terms of the sources of real estate development funds in 2009, the total amount reached 5,712.8 billion yuan ($835.32 billion), of which, domestic loans amounted to 1,129.3 billion yuan ($165.13 billion), foreign funds reached 47.0 billion yuan ($6.87 billion), self-financing funds hit 1,790.6 billion yuan, deposits and advantage payments totaled 1,591.4 billion yuan, personal mortgage loans stood at 840.3 billion yuan and other funds amounted to 314.2 billion yuan (Figure2).
Figure 2 Sources of funds for real estate developer, 2009. Source: National Bureau of Statistics of China
For this year, from January to March, the total investment in real estate development nationwide has amounted to 659.4 billion yuan ($96.42 billion), up by 35.1% compared to the same period last year.
The floor spaces of commercial buildings sold have accounted for 153.61 million square meters, surging up 35.8%. And the total revenue from commercial buildings sold was 797.7 billion yuan ($16.64 billion), increased 57.7%.
Key Players in Real Estate Market
At present, there are only a few Chinese real estate related companies listed on US stock market, which includes:
Real estate developers
China Housing & Land Development, Inc (NYSE:CHLD), went to be listed on the NYSE during February 2007, is a Xi’an (city of China's Shaanxi province) based company. Since it was founded, the company has been engaged in the acquisition, development, management, and sales of residential and commercial real estate properties in the northwest of China.
China Infrastructure Investment Corporation (NYSE:CIIC), got listed on NYSE in 2008. It operates the 66-mile Pinglin Expressway, which is a four-lane toll road in Henan province.
Xinyuan Real Estate Co., Ltd (NYSE:XIN), went on public in December, 2007, is a fast-growing residential real estate developer that focuses on Tier II cities in China,
Real estate services providers
E-House (China) Holdings Limited (NYSE:EJ), founded in 2000 and went on NYSE in August, 2007, is a leading real estate service company in China. Its scope of business includes real estate agency and brokerage services as well as real estate consulting and information services.
China Real Estate Information Corporation (NYSE:CRIC) is a subsidiary of E-House (China) Holdings Limited, which was founded in 2002. The company went on NYSE just last year. Its business includes real estate related services, subscription-based information services, customized consulting services, advertising services, and online services to real estate consumers, developers, brokers.
The table below provides a summary of overall financial performance of these US listed China real estate companies in last two years.
However, the major players in Chinese real estate market are considered to be the domestically listed real estate developers. According to “The Survey of China Listed Real Estate Company” released in early 2009, there are 103 real estate companies from mainland China were listed on Shanghai Stock Exchange and Shenzhen Stock Exchange, and 28 were listed on Hongkong Stock Exchange.
The top three real estate developers in 2009 were China Vanke Co., Ltd (SZSE: 000002), China Overseas Holdings Limited (HKSE: 0688) and Agile Property Holding Limited (HKSE: 3383).
Financial performance of top 3 real estate developer in China in 2009
Highlight of recent real estate bubble
The alleged bubble in the real estate market of China emerged in last 2008, when Chinese government proposed a series of real estate market boosting plans in order to stimulate domestic economic and accelerate china's recovery from the 2008 financial crisis. The stimulating proposal included the facilitation of loan for people purchasing a second residential property; reduction of the land tax for large creditworthy real estate developers; financial supports for the real estate developers through easier access to loans. Correspondently, the Central Bank of China also decreased the lending rate for the developers of low-rent houses by 10%.
Under the policies, the real estate market started to recover and funds were attracted from both domestic and international investors. Consequently, the real estate price was bid up all the way through 2008 to early 2010. Real estate bubble was building up, which can be indicated by the unreasonable high selling price of apartments and reported risky investment behaviors among the general public.
To address the problem, on April 17th, 2010, the China State Council announced “The Notification Regarding the Steady and Healthy Development of Real Estate Market”, in which several measurements are explicated to deal with the soaring housing price, such as increase of the installment of first and second property and the minimum mortgage interest rate (not lower than 1.1 saving interest rate); large increase of the installment and lending rate for people purchasing a third property; enhance the monitoring of financing and purchasing behaviors of real estate developers and further guarantee the transparency of real estate trading transactions.
China Real Estate Market characteristic and its outlook
Real estate market in China is a regulation-sensitive market. Government policies as well as setting of interest rates will largely influence consumers’ decision to purchase houses and the incentive of real estate constructors to develop new buildings, which consequently affect the whole real estate market.
In terms of the outlook of real estate market in China, we are seeing that the government policy addressing the housing bubble is making its effort which has hesitated the risky investing behavior, driven the market price towards a reasonable level and therefore, reduced the risk of explosion of the bubble. Considering the historical trend of real estate market, it is expected that China real estate market will continue its expansion in the foreseeable future.