Home » Business » Biz Commentary
No end in sight for the downturn in real estate
By Eric Chen |
February 21, 2012, Tuesday
|
Print Edition
Print Edition
AFTER the boom years of 2009 and 2010, real estate sales began to drop all around China last year. The market's downturn can be attributed to three major factors: restrictions on home purchases, tighter policies on mortgage lending and the introduction of a property tax in some cities.
The central government has shown no sign this year of relenting on these policies aimed at bringing down home prices. On the contrary, it seems that more strict measures may be in the pipeline. With recent pronouncements by the housing and construction ministry on continuing efforts to stabilize housing price, the market is expecting a new wave of home-purchase restrictions, not only in major cities, but also in second or even third-tier cities.
First-time homebuyers may have been heartened to see the mortgage rate back to the benchmark lending rate promulgated by the People's Bank of China. More favorable rates could be even sought at some foreign banks.
Nevertheless, the loosened lending policy can be regarded only as a minor fine-tuning. The tightened lending policy remains the keynote of 2012.
Following the implementation of trial property tax programs in Shanghai and Chongqing last year, rumors now abound that the property tax will be extended nationwide. Given the disconnected databases of homeowner information among different cities in China, it might be technically ambitious to levy the property tax on a nationwide basis within a short period. That said, there is a good chance that the list of trial cities will be expanded and will include more tier one cities.
Bargain chance
The somewhat gloomy market outlook may give individual buyers a good bargaining position when they are searching for a property - for most of them, their first home. Obviously, more pressure is on side of property developers.
The door to domestic IPOs by developers has been closed since 2010. Although the latest IPO waiting list released by the China Securities Regulatory Commission in early February indicates that there are still three developers - Wanda Commercial Properties, R&F Properties and Beijing Capital Land - in the queue, that doesn't necessarily signal the door will be flung open anytime soon.
The latest statistics on the development loan quota may disappoint some real estate developers who have been hoping for some breathing space on their overstretched cash flows. An unidentified official from the China Banking Regulatory Commission said that banks should be more focused on granting loans to build more affordable properties for people on low incomes.
Foreign financial investors have been another money source for some major domestic developers. Since 2006, quite a number of strict monitoring measures in this regard have been released by relevant governmental authorities, including the Ministry of Commerce, the Ministry of Housing and Urban-Rural Development and the State Administration of Foreign Exchange. Given the rather prolonged transaction timeline required to overcome these policy barriers, foreign investment funds do not seem to be an ideal pipeline for solving the thirst for funds in the domestic market.
Booming PE funds
Given the aforementioned factors, more merger and acquisition activities in the real estate sector should be expected this year as real estate developers not strong to withstand the downturn strive to find an exit.
The years 2010 and 2011 were prosperous for the emergence and growth of domestic real estate private equity funds. Although some have been curtailed by governmental authorities, the limited liability partnership and corporate private equity fund models continue to play an important role in real estate project financing. Developers are keen to establish private equity funding platforms with financial institutions with direct access to capital. Adequate liquidity also expedites the growth of these funds. Having less restriction on foreign exchange, domestic private equity funds can offer more flexibility in capital funding, with immediate effect.
Shrinking margins in residential projects call for a transition in business strategy. Some pilot developers are undergoing a switch from residential projects to commercial and office properties, from development for short-term sales to development for long-term holdings and from the development of single projects to the development of complex projects. From the broader view, diversification in property development could certainly help achieve long-term sustainable growth in the real estate sector.
Eric Chen is a partner of Zhong Lun Law Firm.
The central government has shown no sign this year of relenting on these policies aimed at bringing down home prices. On the contrary, it seems that more strict measures may be in the pipeline. With recent pronouncements by the housing and construction ministry on continuing efforts to stabilize housing price, the market is expecting a new wave of home-purchase restrictions, not only in major cities, but also in second or even third-tier cities.
First-time homebuyers may have been heartened to see the mortgage rate back to the benchmark lending rate promulgated by the People's Bank of China. More favorable rates could be even sought at some foreign banks.
Nevertheless, the loosened lending policy can be regarded only as a minor fine-tuning. The tightened lending policy remains the keynote of 2012.
Following the implementation of trial property tax programs in Shanghai and Chongqing last year, rumors now abound that the property tax will be extended nationwide. Given the disconnected databases of homeowner information among different cities in China, it might be technically ambitious to levy the property tax on a nationwide basis within a short period. That said, there is a good chance that the list of trial cities will be expanded and will include more tier one cities.
Bargain chance
The somewhat gloomy market outlook may give individual buyers a good bargaining position when they are searching for a property - for most of them, their first home. Obviously, more pressure is on side of property developers.
The door to domestic IPOs by developers has been closed since 2010. Although the latest IPO waiting list released by the China Securities Regulatory Commission in early February indicates that there are still three developers - Wanda Commercial Properties, R&F Properties and Beijing Capital Land - in the queue, that doesn't necessarily signal the door will be flung open anytime soon.
The latest statistics on the development loan quota may disappoint some real estate developers who have been hoping for some breathing space on their overstretched cash flows. An unidentified official from the China Banking Regulatory Commission said that banks should be more focused on granting loans to build more affordable properties for people on low incomes.
Foreign financial investors have been another money source for some major domestic developers. Since 2006, quite a number of strict monitoring measures in this regard have been released by relevant governmental authorities, including the Ministry of Commerce, the Ministry of Housing and Urban-Rural Development and the State Administration of Foreign Exchange. Given the rather prolonged transaction timeline required to overcome these policy barriers, foreign investment funds do not seem to be an ideal pipeline for solving the thirst for funds in the domestic market.
Booming PE funds
Given the aforementioned factors, more merger and acquisition activities in the real estate sector should be expected this year as real estate developers not strong to withstand the downturn strive to find an exit.
The years 2010 and 2011 were prosperous for the emergence and growth of domestic real estate private equity funds. Although some have been curtailed by governmental authorities, the limited liability partnership and corporate private equity fund models continue to play an important role in real estate project financing. Developers are keen to establish private equity funding platforms with financial institutions with direct access to capital. Adequate liquidity also expedites the growth of these funds. Having less restriction on foreign exchange, domestic private equity funds can offer more flexibility in capital funding, with immediate effect.
Shrinking margins in residential projects call for a transition in business strategy. Some pilot developers are undergoing a switch from residential projects to commercial and office properties, from development for short-term sales to development for long-term holdings and from the development of single projects to the development of complex projects. From the broader view, diversification in property development could certainly help achieve long-term sustainable growth in the real estate sector.
Eric Chen is a partner of Zhong Lun Law Firm.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
