China Property Market

Chinese developer's zero-interest loans highlights industry risks

China's third largest property developer, Evergrande Real Estate, has joined smaller peers in offering zero-interest down payment loans, a practice reminiscent of the US housing boom that precipitated the global financial crisis.

The easy credit shows the gamble Chinese developers are willing to take to keep sales on track, but also highlights the risk of a broader industry correction if buyers default. Such defaults have been rare in China, where household debt is low by Western standards and banks have traditionally required hefty deposits from buyers seeking mortgages.

Many analysts believe the slowing property sector poses the biggest risk to China's economy in the second half.

Guangzhou-based Evergrande's loans skirt government rules that require a minimum deposit of 30 per cent, while buyers who have put down as little as 6 per cent upfront would find it easier to bail if the market turns.

Data released on Wednesday showed real estate investment slowed in the first half and new property construction plunged.

In June, mortgage lending rose 6 per cent from May to 117 billion yuan (HK$147 billion), compared with monthly growth of 2.5 per cent in May.

Liao Qun, chief economist at Citic Bank International, said interest-free down payment loans increased the risk of default, but that the scale of such promotions remained small.

"Developers have seen their liquidity deteriorate as collections from presales have declined, because banks were not granting mortgage loans easily and developers had to provide instalment plans to attract buyers," said Agnes Wong, a Nomura credit analyst in Hong Kong.

Some China property executives shrugged off comparisons with the "subprime" bust in the United States, citing China's low household debt ratio.

"It is not in the Chinese culture to take on too much debt," said James Macdonald, the Shanghai-based head of Savills Research China.

"In China this is not the case at the moment as the market is pretty soft."

http://www.scmp.com/property/hong-kong-c...s-industry

(18-07-2014, 11:11 AM)specuvestor Wrote: Yeah of course they are different... hope I didn't sound otherwise Yet they are related. If the developers are hit by the zero interest deposit loan default, the banks and trusts lending them loans will be pressured as well. 1/2 of the trust loans are property related. They are circumventing the intent of the 30% deposit rules which ironically is to protect them. (hmmm... sounds familiar)

The intent of the 30% deposit rules are to protect the BANKS and not the developers - that is how I see it.

If a buyer can come up with 30% equity as deposit and managed to secure a 70% mortgage loan from the bank to buy a property from the developer, once the property is sold and handed over, the developer only bear the warranty risks. The bank is bearing the credit default risk of the buyer. The 30% equity deposit offers no protection of any kind at all to the developer once the property has been sold and handed over to the buyer - it is meant to protect the BANK.

Initial Cash Flow – with 30% deposit from buyer
Property Price = 100
Buyer = -30 (30% down payment in the form of equity)
Bank = -70 (mortgage loan to buyer)
Developer = + 100 (sale procees)

Initial Cash Flow – zero interest 30% down payment from developer
Property Price = 100
Buyer = 0 = +30 (30% loan from developer) - 30 (30% down payment)
Bank = -70 (mortgage loan to buyer)
Developer = + 70 = +100 (sale proceed) - 30 (zero interest down payment loan to buyer)

The banks still bear the same risks as before – credit default risks of buyers for the 70% mortgage loans.

For developers, instead of getting no sale and zero cash flow, they still could get 70% of the initial cash flow by taking on the credit default risks of buyers for their 30% zero interest loans. If these "desperate" measures could help ease their tight liquidity situation, there is no reason not to do it.

(23-07-2014, 10:48 PM)Boon Wrote:

(18-07-2014, 11:11 AM)specuvestor Wrote: Yeah of course they are different... hope I didn't sound otherwise Yet they are related. If the developers are hit by the zero interest deposit loan default, the banks and trusts lending them loans will be pressured as well. 1/2 of the trust loans are property related. They are circumventing the intent of the 30% deposit rules which ironically is to protect them. (hmmm... sounds familiar)

The intent of the 30% deposit rules are to protect the BANKS and not the developers - that is how I see it.

If a buyer can come up with 30% equity as deposit and managed to secure a 70% mortgage loan from the bank to buy a property from the developer, once the property is sold and handed over, the developer only bear the warranty risks. The bank is bearing the credit default risk of the buyer. The 30% equity deposit offers no protection of any kind at all to the developer once the property has been sold and handed over to the buyer - it is meant to protect the BANK.

Initial Cash Flow – with 30% deposit from buyer
Property Price = 100
Buyer = -30 (30% down payment in the form of equity)
Bank = -70 (mortgage loan to buyer)
Developer = + 100 (sale procees)

Initial Cash Flow – zero interest 30% down payment from developer
Property Price = 100
Buyer = 0 = +30 (30% loan from developer) - 30 (30% down payment)
Bank = -70 (mortgage loan to buyer)
Developer = + 70 = +100 (sale proceed) - 30 (zero interest down payment loan to buyer)

The banks still bear the same risks as before – credit default risks of buyers for the 70% mortgage loans.

For developers, instead of getting no sale and zero cash flow, they still could get 70% of the initial cash flow by taking on the credit default risks of buyers for their 30% zero interest loans. If these "desperate" measures could help ease their tight liquidity situation, there is no reason not to do it.

I reckon Mr. specuvestor was advocating the same point, the 30% is for the protection of Banks, wasn't he?

I do agree the zero-interest loan, greatly improve the cash flow of developers. It is a much better option than giving 30% discount.

Evergrande, the third largest property developer had recently announced its contracted sales results:

http://www.evergrande.com/ir/en/press/p140707.pdf

- sales revenue in June 2014 of RMB 13.1 billion ( up 25.8% Y-o-Y )
- sales revenue for the first 6 months (Jan to June) of RMB 69.32 billion (up 55.4% Y-o-Y)
- ASP from Jan to June of RMB 7,076 per sqm ( up 5.4%).

The sales results this year so far looks SURPRISINGLY good to me – much better than last year.

Looking at its balance sheet and cash flow, it doesn’t appear to me that Evergrande is experiencing any immediate or near term liquidity crisis – wondering why it has also joined the smaller developers in offering the zero interest down payment loans. .

That said, apparently its zero interest down payment loan schemes are for a few selected properties only – not a company-wide policy.

________________________________________________________________________________________________________________

Meanwhile, Keppel Land has also released its 2Q/1H 2014 results – its China results also look pretty good to me.

http://infopub.sgx.com/FileOpen/Keppel.L...eID=306417

Steady Overseas Sales Despite Market Challenges
Overseas, the Group sold about 1,200 residential units in the first half of 2014. Despite the challenging market conditions and fewer available units for sale at The Botanica and The Springdale, the Group achieved sales of about 1,060 units in China during the period. Sales came mainly from The Springdale in Shanghai, Central Park City in Wuxi, The Botanica in Chengdu and Stamford City in Jiangyin, contributing 62% of the total units sold in China for the period. In China, about 2,300 sold units were completed in the first half of 2014.

Market Review
Home sales in Singapore and China have slowed down due to the property cooling measures that were imposed………………..

Similarly in China, home purchase restrictions have continued to affect sales and the tightening of bank lending has further dampened the market. Nonetheless, the recent loosening of property measures in some cities and robust demand from end-user buyers are expected to steady the market.

Grow Commercial Portfolio Overseas
Leveraging our expertise in building and managing award-winning office and mixed-use developments, we have set out to grow our commercial portfolio overseas.

In Shanghai, our Lifehub @ Jinqiao, a retail mall in Pudong, has seen 15% positive rental reversion since we acquired it in early 2013, while Park Avenue Central, a retail-cum-office development in Puxi, is currently in the design development stage. Riding on strong office demand in Beijing, we are also developing an office project in the heart of Beijing’s CBD.

I always like the argument that a govt, company and etc has control over what is happening. My question is if they have control over what is happening, why did they end up in such a situation in the first place. I agree that entities has certain control over certain situations but they are just part of a flux....

http://www.cnbc.com/id/101862232

Is China property done dirt cheap?
Leslie Shaffer | Writer for CNBC.com
1 Hour Ago
CNBC.com
COMMENTSStart the Discussion

Wang Zhao | AFP | Getty Images
China's slowing property market tops the list of major economic risks, but some analysts say the sector's stocks are "dirt cheap" and now is the time to buy.

"We have been waiting for a catalyst for the dirt cheap China property sector and the time now seems ripe," Nicole Wong, regional head of property research at CLSA, said in a note Wednesday, citing reports the city of Beijing has seen mortgage rate cuts as a key driver.

Read More Why China hasn't seen more defaults
While Beijing appears to be the only city currently seeing the mortgage discounts, banks in other cities are likely to follow suit, she said, adding that some local governments aren't waiting on the banks and are increasing the availability of pension-backed mortgages.


"Historically, sale volume always picks up with credit and with various local governments signaling support by relaxing Home Purchase Restrictions and peak property season starting in September, we believe sales volume will accelerate and price/margin will stabilize," she said. "Earnings visibility will improve and the sector should re-rate."

China's house prices increased at double digit rates throughout most of last year, but began cooling towards the end of 2013 as government tightening measures started to take effect.

Read More China property stocks jump on hopes curbs will be relaxed
In June, average new home prices in China's 70 major cities fell 0.5 percent on a month-to-month basis, marking their second consecutive monthly drop after May's 0.2 percent decline, although Reuters calculations indicated prices rose 4.2 percent year-on-year after rising 5.6 percent in May.

Some are expecting the physical property market could see a sharp correction in the months ahead, but still like some of the sector's stocks.

"It is too extreme and premised on too many misunderstandings to assume the China property market is 'game over' forever," Citigroup said in a note Monday, adding it sees opportunities amid the pessimism.

Read More China property primed for shake-up as downturn drains cash
Over the next two years, Citigroup expects average selling prices in the physical market will fall around 20 percent in tier one and two cities and 30 percent in tier three and four from their levels at the end of 2013, with national contracted sales volume to fall 10 percent and 20 percent on-year this year and next respectively.

But when it comes to sector stocks, while they are likely to range-trade for the rest of the year, "there is upside more than downside," it said, with share prices already factoring in the price declines. It noted that sector stocks are trading at around 7.2 times 2014 earnings, compared with a historical average of 9.1 times.

It advises accumulating high-quality players with strong execution records and with the potential to act as industry consolidators, such as COLI, Shimao, and Sunac among Hong Kong-listed shares and Poly China and Vanke among mainland-listed stocks.
Sentiment among investors in the sector may already be improving, Nomura said in a note Tuesday, adding that at a marketing trip in Singapore, investors had mostly moved to a neutral weighting.

Read More Why China property isn't facing Armageddon
Investors cited a sales rebound in June amid price cuts, implying genuine demand, as well as a more favorable credit environment for mortgages and with more cities relaxing policies to support the sector, Nomura said.

"Sales volume will move up gradually in the third quarter, albeit with more price cuts," Nomura said. "We expect a solid pick-up in September and October, with massive new project launches."

To be sure, some are still advising investors steer well clear.
Read More Zero-interest loans highlight China property risks
"I won't put my money into China," Andrew Freris, CEO at Ecognosis Advisory, told CNBC. He expects China's economic growth will continue to slow this year before flattening out early next year.

"That's why my advice to my clients is keep out of equities [and] the equities that are related to the property sector, I emphasize that, to about the middle to the end of the first quarter next year," when there will be clear evidence economic growth has stabilized, Freris said. "That's when I'll begin to lick my chops again," he said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

China Home Prices Falling Faster Despite Govt Stimulus
Home prices across China fell at a faster pace in July according to two private surveys of the housing market. The downward trend appears to show that the government’s moves to prop up the once sky-rocketing real estate sector have so far failed to stop an extended decline in the nation’s housing market.

According to a survey of 288 cities across China conducted by the China Index Academy (a unit of real estate agency E-House) average home prices fell 0.13 percent last month compared to June to RMB 10,835 (US$1753) per square metre. The fall came at a faster pace than the 0.06 percent average decline that the June edition of the survey had (revealed and marked the fourth straight month of falling average prices.

Even China’s strongest housing markets were not exempt from the trend, with prices falling 0.5 percent in Shanghai and 1.6 percent in Beijing during July.

Although the E-House report showed that average home prices for July were still up 4.3 percent over the same period in 2013, that year on year margin was down from the 5.3 percent spread achieved in June.

A competing survey from real estate website Soufun’s China Real Estate Index System (CREIS) also showed average home prices falling more quickly last month with a nationwide decline of 0.8 percent, compared to 0.5 percent during June. July was the third straight month that Soufun’s survey indicated declining average prices across China after a two year run of price increases.

On a year on year basis, the Soufun survey also showed prices remain above the mark from July 2013 by 4.7 percent, although this also indicated some compression compared to June’s 6.5 percent gain over the same month in 2013.

Among the 100 cities that Soufun surveyed, 76 communities had declining average prices, compared to only 71 in June. A government survey of June prices released in mid-July indicated falling prices in 55 out of 70 cities.
Read More Here..

^^ Gradual removal of home purchase restrictions are called stimulus?

Chinese property owners warm to the rental business
DOW JONES AUGUST 13, 2014 12:00PM
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The glut of vacant homes across China owned by small investors has fueled a cottage industry: companies that help owners rent their homes for short-term stays.

At least four short-term and vacation-home rental firms have sprung up since 2012, fueled in part by the higher number of vacant homes in the market. Long-term rentals in China have been around for some time, but they haven't been popular with homeowners, especially in smaller cities where yields are low and landlords complain tenants often wreck properties.

Chen Chi, chief executive of website Xiaozhu.com, a Chinese equivalent of U.S. rental-sharing website Airbnb, said the idea of renting out homes on a short-term basis is gaining acceptance as more people embrace the concept of a "sharing economy."

"Just like how carpooling is becoming more popular, people are becoming more comfortable with renting out their assets when no one is using them, " said Mr. Chen.

Over 5,000 landlords have registered their homes with Xiaozhu.com since its launch in 2011, Mr. Chen said. The site lists 20,000 homes in Beijing, Shanghai, Guangzhou, Chengdu, Nanjing, Qingdao, Chongqing and Xi'an.

Other startups have targeted property developers amid stiff competition in the building industry, saying rental income can make second and third homes more desirable to customers. In June, property developer China Vanke Co. signed a partnership with online startup Tujia.com to rent out vacation homes when their owners aren't using them. Tujia currently lists about 90,000 homes aimed at domestic travelers.

"Working with Tujia bridges the distance between second-home ownership and demand from travelers," said a Beijing-based Vanke spokesman.

The trend represents a change in the attitude of small property investors in China. In the past, they generally avoided renting out homes and apartments and instead left them vacant with plans to sell them later for a higher price. The strategy was profitable several years ago, when home prices were rising at a rapid clip. Most homeowners in China don't pay annual property taxes, so keeping the units empty didn't require large costs beyond the mortgage.

But now that home-price appreciation is cooling and there is the prospect of property taxes--on trial in some cities--being introduced nationwide, some homeowners are changing course.

"It helps offset my mortgage costs," said Liu Yu, a 40-year-old electronics salesman who, since November, has been renting out his two-bedroom Beijing apartment to short-term renters, charging 198 yuan (about $32) a night.

It wasn't an easy decision, Mr. Liu said. In 2008, he rented out the other apartment he owns, in the city of Chongqing, to a family. In the two years they stayed there, they trashed the place, he said, forcing him to spend all the money he made in rent on repairs. "It put me off renting out my homes for a while," he said. "It helps that there are more options now, such as short-term rentals." Stays at his home have ranged from as little as a day to as long as three months.

Average home prices in 35 Chinese cities more than tripled between 2000 and 2010, according to the Institute of Real Estate Studies and Tsinghua University, with most of the appreciation seen after a government economic-stimulus program in 2008. This sparked fears of a housing bubble, as home buyers snapped up multiple properties, resulting in uninhabited towers and empty villas.

More than one in five homes in Chinese cities is vacant, according to a survey by researchers from China's Southwestern University of Finance & Economics. If China's property market sees a sharp price decline, panicked investors of these empty units could rush to sell, said Li Gan, the professor who oversaw the survey, "and this could potentially trigger a housing-market collapse."

Price appreciation has eased since 2010, after the government adopted measures to rein in rising home costs. This year, the supply glut has eroded home prices in many cities outside Beijing and Shanghai, prompting some potential home buyers to put off purchases until prices stop falling. Housing sales nationwide fell 9.2% to 2.56 trillion yuan ($416 billion) in the first half of this year from the year-earlier period.

Wang Xiyuan, a Beijing-based tech executive, said he has no plans to buy more property, preferring instead to focus on managing what he already owns: three apartments in Beijing and two in Changzhou. "Buying investment homes in hopes of flipping them for profit? That era is over, " said the 39-year-old.

Mr. Wang reckons the first apartment in which he invested, bought in Beijing in 2003, has more than quadrupled in value. The following year, he bought a second apartment in Beijing as an investment, leaving it empty until 2008 before deciding to rent it out. The year after that, he bought a villa in Changzhou, a city in the Yangtze River Delta region about an hour from Shanghai by bullet train.

"The villa has been empty till now, but I'm considering putting it up for short-term rentals if there is demand," said Mr. Wang. His parents are staying in his first Changzhou apartment, and the other apartment in Beijing is leased to short-term tenants.

Fall in lending stokes China property prices fears
THE AUSTRALIAN AUGUST 14, 2014 12:00AM

Scott Murdoch

China Correspondent
Beijing
China’s credit growth
China’s credit growth Source: TheAustralian
NEW lending levels in China have fallen to the lowest level in more than six years, renewing concerns that the property market will again be the next major trouble spot for the national economy.

The People’s Bank of China revealed yesterday new yuan lending was just 385 billion yuan ($67.2bn) in July, down sharply from the 1.1 trillion yuan recorded in June.

The results surprised financial markets economists who had predicted that lending would be at least 727.5 billion yuan, after the record level was achieved in the previous month.

Aggregate financing, a broad measure of liquidity in the domestic financial system, reached 273.1 billion yuan, down from 1.21 trillion yuan in June, and is set to hit its lowest level since 2009.

The weaker results prompted a sell-off across Asia-Pacific regional markets as investors became concerned that China’s volatile property market could be about to slow dramatically.

Housing prices in China’s top-tier cities have recorded double-digit falls over the past two years after a massive increase of supply hit the market, but these have stabilised in recent months.

There are now concerns that the nation’s smaller cities will suffer similar price falls after a sudden building rush. UBS economist Wang Tao said the credit growth softening was a “negative surprise” and the sudden fall in aggregate finance was the result of lower bank lending and reduced bank bill acceptance as part of some firms’ financing arrangements.

Ms Wang said the July results would also have been skewed by a surge in the deposit levels recorded by the Chinese banks during June and tougher shadow banking regulations put in place by the government.

“We don’t believe this data reflects a credit tightening by the People’s Bank of China evidenced by recently policy intentions expressed by the Politburo and the central bank,” she said. “There was also ample interbank liquidity and strong credit growth in June which surprised on the upside.”

ANZ chief China economist Liu Li-Gang said the sudden decrease in new loans could be the result of Chinese commercial banks becoming risk averse, especially towards commodity-sector lending.

The National Bureau of Statistics late yesterday revealed that retail sales rose by 12.2 per cent, industrial production picked up by 9 per cent and fixed-asset investment grew by 17 per cent in July, compared with the same time last year.