China’s property market prepares for shake-up

China’s property market prepares for shake-up

By Geoff Dyer in Shanghai and Tom Mitchell in Shenzhen

Published: February 14 2008 17:40 | Last updated: February 15 2008 02:12

A real estate agency closing hundreds of branches while the owner of another absconds; property developers cancelling fundraisings and debt spreads widening dramatically; house prices slumping – these sound like recent tales from the US housing market.

Yet these events have happened in the past three months in China, as some parts of the country’s housing market have shown signs of real stress.

Shares in many of China’s largest listed property developers have fallen more than 50 per cent from their highs of last year in the face of investor fears that some developers might be forced into bankruptcy.

After a couple of years of rapid investment, Chinese developers have been caught between two forces – government efforts to slow economic growth and the global credit crunch. The authorities have taken unusually strong measures to limit credit growth and have promised to introduce a tough new policy to reduce developers’ holdings of unused land.

Planned share listings have had to be shelved, but the most worrying signals have come from the debt market. According to BNP Paribas, both China Agile Property and Greentown China have seen the spreads on credit default swaps (which allow investors to buy insurance against default) more than double since October to more than 1,000 basis points this month, indicating a high level of investor uncertainty.

Partly as a result of these measures, the volume of property transactions has fallen sharply since November and, in the two main cities in southern China, Shenzhen and Guangzhou, prices have also slumped.

Real estate agents are already feeling the pain. Shenzhen-based Chuanghui, which had been one of the largest in the country, has closed more than half of its 1,800 branches. “We are doing our best to get cash,” says Zhang Min, a planning manager at the company’s headquarters. “We have closed many outlets and got the rental deposits back.”

In November, another Shenzhen-based agency, Zhongtian, closed most of its branches amid reports that its chief executive had gone into hiding. Analysts say it is no surprise that markets in southern China have been hardest hit. Partly as a result of its proximity to Hong Kong, the region has seen much more speculative buying than anywhere bar Shanghai.

Moreover, while northern Chinese housebuyers like to pay in cash, mortgages are much more common in the south, which makes the market more vulnerable to credit restrictions and slowing growth.

“Developers with a bigger presence in the south are much more at risk,” says Eric Wong, a property analyst at UBS in Hong Kong.

The question is whether all these developments will add up to a series of defaults. Most observers think that unlikely. For a start, although individual cities such as Shenzhen have seen unsustainable price surges, economists argue that the national housing market is relatively stable and that prices have actually become more affordable.

According to Andy Rothman at brokerage CLSA in Shanghai, the average price of houses in 70 cities rose nearly 8 per cent last year, while real urban incomes accelerated by 12 per cent. “If there are problems in the property market, then they are likely to be very local ones,” he says.

Rapid urbanisation and a growing middle class will continue to underpin housing demand. Moreover, the market is much less leveraged than the US, with banks asking for substantial initial down-payments from mortgage customers.

“People in China will grin and bear it, even if they bought the property at the very peak of the market,” says Mr Wong at UBS.

“The situation is not like the US. If the market does fall, it will be a correction in an upward secular trend,” he adds.

Many of the companies feeling financial pressure have other options. While those listed in mainland China need regulatory approval to sell new shares, the Hong Kong-listed companies can quickly organise placements at steep discounts if they need to. There are also plenty of private equity firms that have raised funds in recent years and are looking for Chinese projects to invest in.

Short-term credit problems could also encourage more takeovers in a sector still dominated by a large number of relatively small companies.

“The next phase for the sector is consolidation, rather than bankruptcy,” says Mark Lo, a credit analyst at BNP Paribas in Hong Kong. “The better names will simply buy projects from, or enter joint ventures with, the companies that have liquidity problems.”