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Real Estate Tycoon Sees Titanic Moment for China’s Housing Market

May 27th, 2014 by
A Chinese national flag flutters at a construction site for a new residence complex in Beijing, in this November 4, 2013 file photo.

 

Reuters

China’s once buoyant property market is facing some rough sailing. In fact, according to one tycoon – Soho China Ltd0410.HK +0.48%’s chief Pan Shiyi — the real estate market is looking more like the Titanic headed in the direction of an iceberg.

Mr. Pan, the co-founder and chairman of Soho China Ltd., is taking a very bearish view on the housing market, which has struggled this year. In the first four months of the year, home sales were down 9.9% from the same period a year ago in value terms, official data shows. New construction starts — as calculated by area — were down almost 25% year over year in the same period.

As if that’s not bad enough, demand is also weakening in an expanding number of cities as banks tighten mortgage lending and sales are dampened by widespread expectations of price cuts.

“I think China’s property market is like the Titanic and it will soon hit an iceberg in front of it,” Mr. Pan told a financial forum on Friday, according to the China Business News.

“After hitting the iceberg, the risks will not only be in the real estate sector. The bigger risk will be in the financial sector,” he added.

He said serious problems lie with financial products like trust and wealth management products, as well as entrusted loans that charge higher interest rates than banks and are key financing vehicles for the property sector.

“When housing prices fall 20% to 30%, these problems will be all exposed,” he was quoted as saying.

Soho China declined to comment about Mr. Pan’s remarks. But in a post on his verified Weibo account Monday, Mr. Pan said  that during the forum’s question and answer session, he had first asked whether there were any journalists present before replying to a question about the housing market. Only upon being told there were no reporters present, he said, did he proceed to answer.

“I didn’t expect there are countless reporters hiding [in the audience],” he said.

Soho has been putting at least some of its money where Mr. Pan’s mouth is – that is, by taking it out of the local property market.

In February, Soho China, run by Mr. Pan and his wife Zhang Xin, announced plans to sell all of their interest in Soho Hailun Plaza and Soho Jing’an Plaza in Shanghai for about 5.23 billion yuan ($853 million) to Financial Street Holdings, a Shenzhen-listed property developer.

It isn’t all bad news though for China’s property market, and help may be on the way.

The central bank has instructed commercial banks to make mortgage lending a priority. Likewise, some local governments have taken steps to ease their curbs on home purchases, which were put in place when prices seemed to be soaring out of reach for most of China’s 1.3 billion people. They’ve also eased restrictions on residency requirements and in some cases have rolled back curbs on buying a second or third home.

But these measures  have been relatively modest so far and Beijing has not given the market a clear signal it can go back to its old speculative ways.

Though Mr. Pan didn’t comment on the government’s moves to soften property curbs, he did say he believes many forces — including plans for a nationwide property registry, an expanded use of  the property tax and more land for development as a result of rural land reform – will help drive the market lower.

“I am not optimistic about China’s property prices,” he said.

If a property specialist like Mr. Pan thinks the market is close to a Titantic moment, perhaps it’s a good idea for buyers to stay close to the life boats.

–Grace Zhu. Follow her on Twitter at @GraceWSJ.
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      • 1:23 pm May 27, 2014
      • Regular Joe Investor wrote:

      A Typical Apartment in Shanghai Costs More Than 45 Times The Average Residents.

      So what started out as a comment on Seeking Alpha is turning into an official article. I’m going to discuss my observations and opinions regarding the housing bubble in China, and what I expect to happen sometime in the near future. I am not a financial professional. I invest a little money on the side. I’m a small timer. Just an average Joe. And these are just my observations and opinions. I am certainly not trying to hurt or offend anyone. Thank you.

      There is currently an oversupply of housing in China. Nowhere else in the world has there been so much construction for residential housing, commercial, and office space than there has been in China the last 10 years. This has led to a huge surplus in housing. And nowhere else in the world are there entire Ghost Cities as there is found in China.

      In the well known 60 minute article, China Vanke Co.’s Wang Shi states that yes, there is a Real Estate Bubble in China. And when asked if the typical apartment in Shanghai was 45 times the average residents salary…Mr. Wang Shi said that it was even higher…and he went on to say it was dangerous.

      If the typical apartment in Shanghai costs more than 45 times the average residents salary, then I think it’s safe to say that mathematically, the average resident in Shanghai who doesn’t already have a house…cannot afford to buy one today…

      So, if the average resident in Shanghai is not able to buy the typical apartment, then the next question is…who is buying up all the apartments there?

      The rich, maybe some real estate investors, Chinese companies investing its money in Chinese apartments, REIT’s, and lastly the corrupt Chinese government officials are left to buy the typical apartment in Shanghai…

      And these individuals, companies, and the corrupt Chinese government officials who could afford to buy the apartments in Shanghai…if they followed regulations…then they would only be allowed to buy a certain number of apartments in Shanghai…right?

      Because in Shanghai and other cities…China has initiated housing curbs in the past in order to rein in speculation in housing…and the subsequent soaring housing prices.

      These housing curbs initiated by the Chinese Government include raising the down-payment mortgage requirements, increasing construction of low-cost social housing, and restricting home purchases in about 40 cities.

      I think increasing the construction of low-cost social housing probably wouldn’t really affect the property market, because, again, the average Chinese resident cannot afford an apartment anyways. But providing special low-cost social housing will satisfy one of the basic needs for those who need but cannot afford housing in China.

      However, not everyone follows the rules. There are so many articles on how some corrupt or unlawful Chinese are somehow averting the rules and buying more properties than they are allowed to buy. In one instance, a banker from the northern province of Shaanxi was able to amass a property Portfolio of over 41 apartments in Beijing by forging or illegally purchasing documents. The corruption in China is extreme. And that is another article in of itself.

      Chinese President Xi Jinping is on a crusade to purge these corrupt Chinese officials. The corruption in the Chinese Government is immense. Please Google Chinese Corrupt Officials to see a slew of articles covering this in depth, as well as to see what Chinese President Xi Jinping is doing to combat it. This will lead to a decrease in the number of wealthily corrupt Chinese officials who are buying up all the excess housing in China.

      I believe that a lot of the Housing in China is being illegally purchased by individuals and companies who can afford to buy up all the properties for sale. These individuals and corporate companies investing its money are illegally buying more homes than they are supposed to. However come June of 2014, there will be a drafted copy of the Unified Property Registration System which will be implemented by the end of 2014. The purpose of the Unified Property Registration System is curb corruption and unlawful activities, and this will keep someone from buying more homes than they are supposed to. The new Unified Property Registration System will allow one unified system to track all properties that are bought or sold, and in this manner, the Chinese Government will be able to locate corrupt Chinese officials or anyone else who may be unlawfully buying or selling apartments in mass. The new Unified Property Registration System will also allow the Chinese Government to keep track of how many properties every individual buys, thus allowing it to enforce the number of properties they may buy.

      Demand is slowing because the people who can afford to buy houses in China have already bought one. Otherwise, the people who have not yet bought a house can not afford to buy one.

      Individuals who have wrongfully purchased houses in any manner are currently listing their properties to sell before the new Unified Property Registration System takes place later this year. This is important because the new Unified Property Registration System will catch those corrupt or unlawful home owners whether or not they sell or keep their homes.

      As a result of the Unified Property Registration System, those individual who wrongfully amassed their real estate fortunes in China and are not discovered, will have to invest in further real estate ventures outside of China. Thus the huge increase in Chinese foreign real estate investments in United State, Europe, and Australia among other countries as compared to last year.

      As for the lawful rich, who are able to buy houses in China, they are now also looking to invest their money over seas. Overseas investments have increased significantly from last year. And all this investment money flowing out of China is only going to further hurt the sales of homes in China.

      I do not have a financial back ground, but I do invest in Real Estate in the United States. I have ready as many books in real estate as I could over my 10 years as a real estate investor. So real estate and real estate investing is something I feel like I know a little about.

      And I believe that investing in empty homes is like burying money into the ground. Anyone who has ever owned a House knows that houses Deteriorate and will need maintenance over time. And this is something the Chinese who buy houses for investment purposes do not appear to be thinking about at this time. Most Chinese developments do not even have Home Owner’s Association dues, and this is puzzling to me. Because what happens when the elevator breaks down? Someone has to pay for it.

      The Chinese who are buying up the apartments appear to be investing for price appreciation, and real estate investors know that you invest for cash flow and not for price appreciation. Price appreciation is just a bonus you may get over a long period of time investing in real estate and should never be the primary reason for investing in real estate. And when you invest for price appreciation, it’s not really investing…its speculation…as you are speculating that the price of housing will go up in the future. As a real estate investor, I rely on my tenants to pay my carrying costs for my rentals as well as provide me with a healthy positive cash flow every month.

      There is less and less land available to sell and this is where cities get upwards of 60% of their revenues. So the Cities will need to at some point, come up with another source of Revenue…which will eventually lead to Property Taxes. And every real estate investor knows that an empty home with Property Taxes is a money losing proposition. And if the Cities do nothing…then, in the end…they’ll run out of money…

      There will be less and less land to build on over time. And the land available to build will continue to get more expensive to buy over time. And there will come a time when the cost of the land will be so high…that it will not make financial sense for the real estate development companies to continue to operate.

      More expensive land, coupled with a discounted property Market is signaling the end for many Real Estate Developers in China. And as housing sales slow in China, it will affect the housing materials industry as well. And since the housing industry is such a huge part of the Chinese economy…ultimately the entire Chinese economy will be greatly affected by the coming real estate collapse.

      If the Real Estate Developers cannot sell the finished Residential Houses and Commercial Buildings, then the Banks will be left responsible for the outstand loans. And the houses and buildings are really not worth that much…empty and unwanted.

      China has a Shadow Banking System which allows the less qualified Real Estate Developers to obtain loans at a higher interest rate. This just makes the less qualified Real Estate Developers even weaker by having higher carrying costs. And more and more developers are having to rely on the Shadow Banking System for their construction loans.

      China’s population is hardly increasing. China has had a one child policy for the last 35 years.

      My take on urbanization is that yes, the Chinese population is moving from the Rural Areas to the Urban cities, but this doesn’t help the Chinese real estate market since, again, the average Chinese person cannot afford to buy a home at over 45 times the average residents salary in cities like Shanghai.

      I have read that Land in China is not actually sold, but leased to Developers for up to 70 years. “Leased.” And wording on the lease contracts are not clearly spelled out as to what happens when the 70 year lease term expires. So the clock is ticking…and I would think as time goes on the less value a house or property would have…kind of like a stock option with an expiration date.

      • 11:24 am May 27, 2014
      • Ken wrote:

      The Chinese housing bubble was obvious years back. The only question left is who will get out with gains and who will be the greater fool. The pattern is familiar as the US just had a housing bubble burst. The only difference between the US and China bubbles are that the mechanisms used were different and that the US had the financial depth to survive. China is in deep doo doo.

      • 9:47 am May 27, 2014
      • Tell us something we don’t already know wrote:

      Larry Lang had the same reaction when he learned his speech was being recorded on his, “Every Province in China is a Greece” presentation back in 2011.

      Thanks to Chinese government corruption, government waste, local government debt, and the infamous Shadow Banking crisis, it’s all now about to burst.

      The addition of the property market crash in China only hastens the coming bubble burst for China.

      • 9:11 am May 27, 2014
      • 25% to 35% of China’s GDP is in housing……… wrote:

      The Chitanic is sinking!

      • 7:55 am May 27, 2014
      • Michael O. wrote:

      The few thousand who hold the wealth on the backs of de facto slave laborers who comprise the masses are now surprised that few people can afford their high priced properties. China simply had a “Dubai moment”. Now let the workers who built your fortunes, live in the vacant homes. Sounds like Zhivago all over again. “Zhivago 2″ by way of “Communist China”. Sounds like a latter day Mash type of farce.