Why China property isn’t facing Armageddon

[greengiraffe]

http://www.cnbc.com/id/101810427

Why China property isn’t facing Armageddon
Leslie Shaffer | Writer for CNBC.com
2 Hours Ago
CNBC.com


Frederic J. Brown | AFP | Getty Images
China's slowing property market may be drawing comparisons with the U.S. housing bust, but some analysts are starting to call a recovery and see developer stocks as a bargain.

"I foresee price declines for less than six to 12 months and then it will come back to a recovery trend, especially for tier three cities," Carol Wu, head of research at DBS Vickers, said at an event this week for clients of DBS' private bank.

That means the shares of China's developers are in bargain territory on a 12-month horizon, she said. The sector is "really quite attractive" at around five times earnings, with even the biggest players such as Vanke and COLI trading around six to seven times earnings, compared with expectations for growth of around 10-20 percent over the next few years, she said.

Read More China property primed for shake-up as downturn drains cash
Concerns that China's property market is a popping bubble have moved to the front burner recently, with home sales in the January-May period down 8.5 percent on year in value terms. Property is estimated to account for around 20 percent of the mainland's gross domestic product (GDP).

Wu believes the slowdown is in reaction to 2013's strong sales, when many homebuyers advanced their purchases out of fear prices would continue to rise.

She expects prices in tier two and three cities will fall another 10-20 percent over the next 12 months as developers begin to cut sales prices more aggressively. China's tier system ranks cities on their population size, services standards and stage of infrastructure. Although there's no strict definition, the first tier generally includes China's four biggest cities, while tier-two cities generally are provincial capitals and special administrative cities with a population of above 3 million.

Read More Who's afraid of China's ghost towns?
But while many analysts point to China's tier-three cities as the least likely to recover quickly, Wu is more bullish.

"If you look at the land supply and new construction starts over the past two years, actually those two indicators have started to fall since 2012," she said. "I actually expect a better demand-supply balance in tier-three cities in about a year. The market will start to recover in a year and maybe in two years we will see tier-three cities coming into an undersupply situation, which will support prices."

Nomura is also relatively bullish on China's property market.

Read More Are China's property vacancies a danger sign?
"The market should be largely stable over the next three to four years (a good time for the market to adjust/slow overall real estate investment), followed by a mild decline afterwards," it said in a note this week. "This is mainly supported by the baby boom in the late 1980s, stable marriage population, number of university graduates, decrease of household sizes, and improving per-capita living space."


The bank advises investors stick with big developers as they'll likely outperform as the market consolidates and as they have access to cheaper financing.
Read More China's May home prices rose at slowest pace this year
CIMB also doesn't expect a property Armageddon.

Prices or sales volumes would need to decline by around 40 percent annualized before developers would no longer be able to service their current debts, CIMB said in a note this week after stress testing the cashflows of 135 listed developers.

By way of comparison, the 2008 and 2012 property market declines saw sales values fall by 16.3 percent and 5.0 percent respectively from their peak to trough, it said.

Read More Moody's turns negative on China property
"Much of the current pain in the property market was engineered by the central government in order to deflate excesses," CIMB said, citing demand-side restrictions such as tougher mortgage requirements and supply-side regulatory moves including monetary policy to reduce funding.

"As the government engineered this crisis, they can un-engineer the crisis relatively easily if it starts to threaten the financial system in a big way," CIMB said.

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

[Boon]

What you need to know about China’s housing market

July 8th, 2014 by Michael Klibaner

Through much of the first half of 2014 analysts have cited the housing sector as the biggest risk to growth in China’s economy. However, over the last six to eight weeks we have grown more confident about the outlook for the sector based on what we have seen on the ground and by actions taken by the central and local governments.

You may recall my colleague Joe Zhou, JLL’s Head of Research for Shanghai, wrote a blog at the end of May on the parallels between the current performance in residential market with the dynamics in the 2011 – 2012 period. In the past several months we have seen the following significant actions:
1.The PBoC has urged banks to increase mortgage availability for first time home buyers
2.Local governments in some cities have eased restrictive measures in districts with the most challenging market conditions and they have increased the limits on borrowing from the Public Housing Fund
3.In cities where developers have offered price discounts, buyers have been lured back into the showroom

Collectively, we believe these housing market supports, along with the various ‘mini-stimulus’ actions by the central government, will be sufficient to stabilise transaction volumes in the months ahead. If we are right, then the government has done enough to reduce the likelihood that the housing sector is a big risk to GDP growth reaching the targeted ‘floor’ of 7% in 2014.

To be clear, we expect price indicators to continue to show declines in most Chinese cities, but as long as mortgage availability remains supportive, these discounts will continue to attract buyers and transaction volumes in the coming months will stabilise. It will be on the back of this stable demand that property developers will have the confidence to maintain activity in their pipeline. And this leads us to have confidence in GDP growth coming in on-target in the low 7%s (in January, my forecast for GDP growth in 2014 was a below-consensus 7.3%).

Of course risks remain:
•Credit availability for developers is still constrained and may lead them to slow-down activity
•Last years’ most active source of capital – the trust lending market – is at a virtual stand-still now
•Equity offerings could fail, thereby limiting capital for development and industry consolidation
•By permitting some small, local developers to default, the central government could undermine buyer’s confidence to buy pre-sales
•The failure of a wealth-management product or trust product held by individual investors could make buyers more risk averse

But we do not see these things as being likely, or if they do happen, we don’t expect them to destabilise the market or buyer confidence in the second half of 2014.

About the author
Michael Klibaner is the Head of Research for Jones Lang LaSalle in Greater China, based in Hong Kong.

http://www.joneslanglasalleblog.com/APRe...ing-market

[specuvestor]

In the short term the way I look at it is simple, property Armageddon has been expected since oct last year when people were worried ½ of the trust loans were property related and peak maturity is May-June this year.

No news is good news. But medium term property prices are likely to continue to weaken, which is what the govt wanted. Not that dissimilar to Singapore stance.

[mrEngineer]

I am writing this from China now. Just visited today a small county not even considered a tier 3 city. I asked about the occupancy rate in the condo facility that I was in and it was only 50%.. The average monthly salary is about RMB 1000 per month while the housing prices are about RMB 3000 psm. Facts are facts and sometimes I simply do not know how to believe these analysts...

[specuvestor]

Not sure whats your definition of occupancy because some are paid but not occupied ie investment properties. Hence many compared this to european cities without understanding that LTV is 50% and many are fully paid up. At a distance they all look the same...

That is not to say there is no bubble in chinese properties but the impact is not going to be as drastic as household leverage is much lower. With unoccupied properties that also means your yield is not going to be fantastic anytime, and so is cap value

in singapore a condo is say around S$1000 psf which is around S$11k psm. 80th percentile of people earn around S$5k and median around S$3.5k. At a distance it looks similar too

[mrEngineer]

I would presume my local contact was saying 50% unsold as the discussion followed by housing prices there are too expensive and resulting all these empty homes. I was in rural city where it makes no sense for investment anyway.

Maybe I should not use the term condo as there were zero facilities like swimming pool or BBQ pit in that estate. I will say it is more comparable to our HDB or some private apartments. So using fringe Singapore condo is not a fair comparison.

The point I was trying to illustrate is that many analysts forecast too much about urbanisation and massive 70% of China population lives in the non urban area but they have hardly ventured out to the rural cities to understand that these cities have equally good infrastructure or housing as the cities and there is not much incentive for these 70% of population coming into the metropolises. I seriously downplay the under supply situation as they prophesied..

[CityFarmer]

I would presume my local contact was saying 50% unsold as the discussion followed by housing prices there are too expensive and resulting all these empty homes. I was in rural city where it makes no sense for investment anyway.

Maybe I should not use the term condo as there were zero facilities like swimming pool or BBQ pit in that estate. I will say it is more comparable to our HDB or some private apartments. So using fringe Singapore condo is not a fair comparison.

The point I was trying to illustrate is that many analysts forecast too much about urbanisation and massive 70% of China population lives in the non urban area but they have hardly ventured out to the rural cities to understand that these cities have equally good infrastructure or housing as the cities and there is not much incentive for these 70% of population coming into the metropolises. I seriously downplay the under supply situation as they prophesied..

I have touched the ground on the topic, with the local Chinese, whenever there were opportunities.

There are three main reasons for moving into cities, namely job opportunity, healthcare and education. I assume it is not difficult to understand.

Healthcare is vastly different between village and city. I had heard that there are no ambulance service in some villages, the ambulances are dispatched from nearest city, which might take hours to arrive.

Education is also a major concern, especial those with kid(s). I wouldn't elaborate more on the job opportunities, as it is well understood.

Urbanization is an unstoppable trend, and the only major hurdle now is the Hukou, which has denied the healthcare and education services for those not in.

Sharing the findings on the topic.

[mrEngineer]

Cityfarmer, just a friendly discussion, I will suggest if you have a chance to visit these rural cities and keep a lookout for its infrastructure. I have been in worse roads in India and Indonesia. I just bought our famous pork floss bread in one of the bakery in the town and it cost IMO ridiculous price of 7 RMB, but 1.5x bigger than our bread talk. While driving past the bakery, I passed by a hospital that is as large as our NUH. These rural folks are not as poor as what media tries to portray. One of conversation I had with the local contact was the vast difference in lifestyle from 10 years ago and now. This is the speed of China development.

[Boon]

Urbanisation is not only about people moving from "rural" to urban areas - it is also about "rural" areas being "urbanized" or "rural" areas being integrated into urban areas.

Note the difference between these terms in China :

urbanisation 都市化
chengzhenhua (城镇化, literally ‘city- and town-ification’).
urban-rural integration 城乡一体化

________________________________________________________________________________________________________________
Making Rural China Urban

Posted on 18 June 2013 by Mi Shih

The Chinese government’s plans to move some 250 million rural residents into new towns and cities are being followed with interest worldwide. Writing in the New York Times (15 June 2013), Ian Johnson notes: ‘The shift is occurring so quickly, and the potential costs are so high, that some fear rural China is once again the site of radical social engineering.’ In this essay, Mi Shih 史宓 offers insights into how Chinese urban planners and policy makers understand this ambitious project.

Mi Shih is a postdoctoral research fellow in the China Research Centre at the University of Technology, Sydney. A graduate of Rutgers University where she obtained her PhD in planning and public policy, her research areas include social resistance and land politics, rural land conversion and urbanization in China, and community-based planning and city redevelopment in Taiwan. She has conducted fieldwork research in China (Shanghai, Guangzhou and Zhejiang) and Taiwan and her articles have appeared in International Journal of Urban and Regional Research and Urban Geography. She is currently writing on urban expansion and rights formation in Guangzhou and Shanghai.—The Editors
____________

‘Unprecedented’ is the word commonly used to describe China’s urbanisation 都市化. Yet the country remains less urbanised than most developed countries. What makes China’s urbanisation process remarkable and, indeed, unprecedented is its magnitude and speed. Today, fifty-one percent of the Chinese population live in cities as compared to the nineteen percent that did so in 1979.

In 2012, the process of urbanisation entered a new phase following central government directives to pursue a new policy of chengzhenhua (城镇化, literally ‘city- and town-ification’). The directives have been widely discussed in the mainland media and online. The new policy marks the inauguration of a new Party leadership and the effectiveness of its implementation will undoubtedly be used to adjudge the performance of the Xi Jinping-Li Keqiang administration.

So, what distinguishes chengzhenhua from the former process of rapid urbanisation in China? Will the trajectory of ‘becoming urban’ remain the same, such that the chengzhenhua policy ends up being nothing more than novel rhetoric? What goals are China’s fifth-generation leadership attempting to establish, what new practices do they seek to adopt, and which aspects of the status quo does chengzhenhua intend to break away from?

This article attempts to shed some light on these questions. Readers should note that a cross-departmental effort organised by the National Development and Reform Commission (Guojia fazhan han gaige weiyuanhui 国家发展和改革委员会) is currently underway to furnish details about the new policy. The state media have already announced that ‘National Guidelines on Promoting Healthy Development and Planning for Chengzhenhua 2011-2020′ (Quanguo cujin chengzhenhua jiankang fazhan guihua gangyao 全国促进城镇化健康发展规划纲要 2011-2020) will be published in mid-2013. They will go into effect immediately.

Farmers’ old housing sites (on the left) and farmers’ apartments (nongmingongyu 农民公寓) currently under construction. ‘Moving up’ (shanglou 上楼) is a common practice through which local governments merge farmers’ housing sites and redo land use planning in the chengzhenhua process.
Farmers’ old housing sites (on the left) and farmers’ apartments 农民公寓 currently under construction. ‘Moving up’上楼 is a common practice through which local governments merge farmers’ housing sites and redo land use planning in the chengzhenhua process.

Chinese urban planners and policy makers approach chengzhenhua by considering towns and villages as potential sites of transformation. To understand the process by which a rural entity becomes an urban one, we need to consider the institutional reforms that have facilitated this process of transformation. In the discussion below, the Chinese term chengzhenhua will be used to refer to the new policy as the English translation ‘urbanisation’ is misleading for two reasons. First, ‘urbanisation’ is already being used to translate dushihua 都市化, from which the new policy is intended to mark a departure. Secondly, ‘urbanisation’ evokes the image of an expansion of existing urban cores. As such, it forecloses possibilities of imagining the rural as a potentially urban site.

The Goals of Urban-rural Integration

The larger goal and rationale underpinning chengzhenhua is urban-rural integration 城乡一体化. The official discourse describes this goal as ‘breaking the urban-rural duality structure’ 打破城乡二元结构. In 2007, the Ministry of Construction established four ways of rebuilding peri-urban villages so as to integrate them into existing cities. The so-called Four Transfers involve: converting collective land ownership to state ownership; converting the rural household registrations of villagers into urban registrations; re-assigning social services provided by village collectives to selected municipal bureaus; and redeveloping villages according to the urban spatial planning regime.[1] Recent empirical research and case studies, such as those undertaken in the Pearl River Delta region, suggest that wholesale transfers are highly unlikely.

On the one hand, many rural household registrations have been converted into urban ones. Therefore rural residents (cunmin 村民) have been officially renamed as city residents (shimin 市民) and villages (cun 村) as communities (shequ 社区). On the other, local infrastructure and services – in particular, health care, education and social security – remain largely funded through village collectives’ assets and business earnings. Moreover, collective landownership has historically been the most important source of income for villagers, and any ‘across-the-board’ attempt for rural-to-urban land conversion almost always attracts local opposition. These gaps between the state’s attempts at urbanisation and what has happened on the ground suggest that the new policy of chengzhenhua will encounter significant complications, contingent on the actual process of implementation in different places.

The zhen (‘town’) in chengzhenhua

The use of chengzhenhua, rather than dushihua, to describe urbanisation indicates that the new policy is focused on towns (zhen 鎮). Administratively, towns fall under the rural government system in China and are therefore subjected to rural institutions such as collective land, rural household registration and village governance. However, towns can be populous and prosperous. There are over 20,000 towns in China, and the average population of the largest 1,000 of these is over 70,000. In coastal provinces, populations of well-developed and powerful towns (qiangzhen 強鎮) can exceed 500,000 people, as is true of Humen town 虎门镇 in Guangdong province. In interviews and explanations given by officials,[2] a major objective of chengzhenhua is to encourage and accelerate urbanisation in large towns like Humen. Similarly, twenty-seven large towns in Zhejiang province have been selected as experimental sites (shidian 试点). Planners in each of these towns are currently considering which urbanisation path best suits their situation.

Promoting chengzhenhua in Towns

It has become increasingly clear that there is no clear-cut (yidaoqie 一刀切) prescription for implementing chengzhenhua, because each town has its own historical and socio-political conditions. Nevertheless, three main approaches to organising the various practices for ‘urbanising’ towns can be identified.

New zone development (xinqu kaifa 新区开发) is a major strategy used by local governments to implement chengzhenhua. Generating land-related profits through expropriation and conversion of rural collective land is central to this mode of development.
New Zone Development 新区开发 is a major strategy used by local governments to implement chengzhenhua. Generating land-related profits through expropriation and conversion of rural collective land is central to this mode of development.

The first of these is described in the official literature as encouraging farmers to move into the city (nongmin jin cheng 农民进城). Here, the word ‘farmers’ 农民 refers to people who hold rural household registrations with no bearing on their actual employment; ‘city’ 城 refers to the built-up residential areas in towns. The core idea of this approach is to reduce the threshold for people to obtain urban household registrations, especially for those who have already lived, worked, or been educated in towns and cities. An important reason behind this approach is that the rural immigrant population 外来人口 of many towns often outnumber the registered population 户籍人口 by a large margin. For instance, Chang’an town 长安镇 in Dongguan city 东莞市, Guangdong province, has a registered population of 40,000 but an immigrant population of 570,000.[3] Granting rights, entitlements and urban status to at least some of these rural migrants is expected to lead to increases in local consumption, a larger share of tax-based income to be retained by the town government and greater spending on public infrastructure building, which would help further urbanise these towns.

The second approach to chengzhenhua is decentralising the authority for spatial planning. This approach is also commonly referred to as ‘planning first’ 规划先行. Sitting at the lowest level of the administrative hierarchy, town governments have little decision-making power over spatial development. Towns are usually rather passive recipients of the spatial planning conducted by higher levels of government. However, to promote chengzhenhua, towns selected as experimental sites have themselves been granted more power and authority over spatial planning and land leasing decisions. This means that town governments will be much more actively involved in spatial and land-use planning activities and have greater regulatory discretion in determining both the direction and content of town development.

The third approach is the legal relaxation of collective land transfers 集体土地流转. Currently, collective land is subject to many legal constraints on private and profit-oriented development. To permit and encourage chengzhenhua, experiments are currently in progress to both deregulate and marketise collectively owned land. For instance, the Twelfth Five-Year Plan for Chengzhenhua Development in Guangdong Province (Guangdong sheng chengzhenhua fazhan shierwu guihua 广东省城镇化发展十二五规划) has allowed the land use rights of contracted land 承包地 and housing sites 宅基地 to be leased and transferred on the market.[4] This practice of chengzhenhua may significantly increase the degree of commodification of collectively owned rural land in China. In public discourse, this important change to the socialist divide between urban and rural land is lucidly described as ‘capital going to the countryside’ 资本下乡.

It is of course too early to assess the scope of chengzhenhua let alone its outcomes. In the implementation of this new policy in the coming months, what we are likely to see are diverse local practices that accord with the three approaches outlined earlier. However, in all of the towns undergoing chengzhenhua there is likely to be intensive commercialisation of rural collective land. For instance, Zeguo Town 泽国镇 with a total population of 30,000 in Wenling city 温岭市, Zhejiang province, has actively promoted a project called ‘new central zone development’ 新中心区开发. The project, which will lead to the building of a new administrative centre, includes these major tasks: consolidating housing sites previously scattered across the town; revision of land use planning; and the expropriation of a significant area of rural collective land for private development. The project’s goal is to attract capital investments and to generate land-related profits through ‘commodity housing’ 商品房 and real estate development. The process of chengzhenhua will vary from town to town but there is little doubt that the commodification and marketing of rural land is a key objective. The numerous incidents to date of conflict over rural land conversion indicate that local communities may not welcome chengzhenhua. It remains to be seen whether this new policy, the latest in the government’s zeal for development, will lead to heavy-handed treatment of the rural population.

http://www.thechinastory.org/2013/06/mak...ina-urban/

[CityFarmer]

Cityfarmer, just a friendly discussion, I will suggest if you have a chance to visit these rural cities and keep a lookout for its infrastructure. I have been in worse roads in India and Indonesia. I just bought our famous pork floss bread in one of the bakery in the town and it cost IMO ridiculous price of 7 RMB, but 1.5x bigger than our bread talk. While driving past the bakery, I passed by a hospital that is as large as our NUH. These rural folks are not as poor as what media tries to portray. One of conversation I had with the local contact was the vast difference in lifestyle from 10 years ago and now. This is the speed of China development.

No problem. I am also finding pieces of "urbanization" in China, and still trying to get a good big picture. I do agree the pictures media portrayed are misleading.

In fact, I have visited rural city, not one, but few. I agree the infrastructure is good, but only the "hardware", not the "software". The needs of education and healthcare cannot be met just by nice hospital and school alone. You might be surprised by the number of white-elephants around the rural cities.

I do agree the rural folks are not poor, due to the "compensation" from land sales and rentals. Some are richer than most Singaporeans, with millions in RMB. I am happy to retire there, as long as no issue in healthcare. I did see Ferraris around when I was there. Base on the number plate, there are tourists from a tier-1 city, having holiday in a condo nearby as "elegant" as Ngee Ann City, near a seaside