Street view: China real estate

Our researchers went on a deep-dive trip to look at the real estate sector in four top-tier cities in China.

25 Mar 2018

Our researchers went on a deep-dive trip to four of China's top-tier cities - Shanghai, Nanjing, Wuhan and Hefei - to look closely at real estate developers and their projects, and to get a precise sense of how sales were shaping up.

We found strong demand dynamics amid a tightly regulated and restrictive property market.

The key takeaways from our trip break down as follows:

Home purchase restrictions have reduced speculative demand. In the four cities we visited, we found that banks and local governments have imposed tough conditions, including stricter eligibility requirements and increased minimum down payments, on buyers bidding for a second-or third-home. Staff handling sales at the real estate projects we visited said that they are seeing less speculative demand, and this has taken some support for sales out of the market.

Increasing land prices are attracting buyers. Land prices have grown steadily across China, with average residential land prices growing 9.9% y-o-y in Q3 2017, according to China's Ministry of Land and Resources. But developers told us that this has actually helped sales, since buyers are anticipating that higher land prices will push real estate prices up again in the future.

Total Area of Residential Property Sold in Four Cities, 2013-2016 (Million square meters (sq.m))

Source: China Real Estate Information Corp. 2017

Infrastructure build-out is supporting demand. New infrastructure is making outlying suburbs viable for buyers, and the cities we visited all have projects in process. Take Hefei as an example, it had one metro line operating at the time of our visit, but the local government plans another 12 and they are either under construction or in the planning stage. Other infrastructure projects, like inner-city ring roads, are also being executed in most of the cities we visited.

Policy relaxation is boosting rural-urban migration. China is promoting urbanization by making it easier for people to migrate to cities and get access to urban social services. Strict rules governing eligibility for an urban residence permit have put off migrants in the past but these rules are now changing. In cities like Wuhan, the local government is trying to retain college graduates in the city by providing them with incentives, like urban residency status and cash rebates, and that is boosting property demand from new city residents.

Low land supply is squeezing the market. Supply of new development land has fallen steadily in cities like Nanjing and Shanghai, but the urban population in these cities is growing rapidly. In Shanghai, the population grew 23.2% between 2006 and 2016 to 24.2 million, according to official government statistics, but the supply of new land for residential development has fallen during the past five years. Our contacts told us that in this situation, new housing supply is getting increasingly tight, which is putting upward pressure on prices.

Total Area of Land Supplied for New Residential Developments: Shanghai & Nanjing, 2011-H1 2017 (Millions of sq.m.)

Source: China Real Estate Information Corp.,2017

Savvy developers are adapting to changing demand. One developer we visited in Hefei is constructing environmentally-friendly apartments with centralized temperature controls, humidity controls, and air purification. Such features have been a hit with buyers, possibly because of concerns about air quality and the cost savings to buyers of installing their own air purification systems.

Conclusion

Our important takeaway was: even as home purchase restrictions have reduced speculative buying, overall demand dynamics remain healthy in the cities visited and were well-supported by multiple organic and inorganic factors like low land supply, population growth, and high priced land auctions.

That said, local government appetite for seeing price growth seemed low, hence tight approvals for pre-sales with prices caps were expected to stay in near future. Furthermore, policies have become localized and were being fine-tuned according to local conditions.

This implied developers with diverse sets of cities and projects in their land bank portfolio with a wider nationwide coverage would benefit while those overly concentrated in a particular city with restrictions could see their churn negatively affected, impacting their creditworthiness.

In sum, we see opportunity in the market and remain positive on high-yield China real estate developers, particularly those that are diversified nationally.

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