Housing One Billion+ China Residential 2019
China’s residential market has gone through many cycles in its short history. Virtually all of these cycles have been the result of policies designed to cool overheating markets.
The latest round of property cooling started in late 2017 in response to the strong growth in residential prices in the first half of that year—a rise instigated in part by speculative investments and cheaper financing. The tightening measures have been the most severe to date: house purchasing restrictions were implemented in over 22 cities; loan-to-value ratios were set at 30-40% for primary residences and 60-70% for second homes; and mortgage rates in some cases were increased 20% above benchmark lending rates. This time was different because, along with the above policies designed to curb demand, several supply-side policies were instituted, including several significant policies designed to encourage the supply of housing for rent.
While the reform of the leasing market was initiated back in 2015, it was only in the latter part of 2016 and 2017 that policy support was clarified and meaningful progress was made. Supporting measures included the release of land stock specifically zoned for the development of residential leasing, and the opening of new financing channels and tax incentives. As a result of these curbs and supplyside reforms, average transaction prices in first-tier cities have plateaued.
Concurrent to the recent property curbs, there has been a broad-based effort by the government to address the issue of rising debt levels in the economy and, in particular, non-financial corporations. Many companies, including developers, have fuelled much of their expansion over the last decade by increasing their net gearing as liquidity has been pumped into the market and financing costs have fallen. The last 12-18 months have seen informal financing channels largely closed down and a much tighter rein put on bond issuances and bank lending across most industries, including real estate.
Faced with a slowdown in transaction volumes and a freeze on credit expansion, developers have been hurting, with Vanke—oneof the nation’s largest developers—claiming that it was struggling to survive in the current climate. Thus, the developer market at present is consolidating as bigger enterprises acquire assets from smaller ones or buy them outright. Developers are also looking to diversify property portfolios to include sectors supported by the government, such as multifamily, and therefore are more inclined to allow access to additional financing channels such as Asset Backed Securities (ABSs), with the potential for exiting via a Real Estate Investment Trust (REIT) at some point in the future should legislation provide for it.