Chinese cities still booming a year later

BEIJING’S OLYMPIC construction programme was the biggest the world has ever seen, one that transformed an ancient capital into a modern metropolis, complete with huge quantities of residential and commercial property for the citizens of a new China. The completion of that programme, in August 2008, coincided rather too neatly with the economic downturn triggered by the collapse of Lehman Brothers, and there were fears that China’s real estate bubble, like that in Ireland and elsewhere, would burst with dire consequences.

However, the property ads never really dried up for very long in the magazines of China’s major cities, and there are still plenty of cranes on the horizon. This was largely due to the government injecting €400 billion into the economy in a massive fiscal stimulus plan, combined with an unchanged need for housing in the world’s most populous nation. Add in the unwaveringly strong savings rate in China and you have a property market that is basically holding its own.

“The recovery is real. It’s not 180 degrees, but a shift in the right direction. People held their breath for eight months. The difference between China and the rest of the world is that the rest of the world never had any money. You can’t overestimate the value of savings and this is the differentiator,” says Anna Kalifa, vice president of business development at GTC Real Estate China.

“Nothing changed in China in terms of the need for new houses. In China there are very different fundamentals compared to the United States. People have money here to put down deposits for property,” she said.

An important dimension in the Chinese market are the various cultural differences at work. Chinese people tend to live with their parents until they get married, and that means they have a lot more money saved when it comes to buying a house. Also, the one child policy, which restricts most families to a single offspring, means a whole family of aunts and uncles will invest in one child’s future.

The Bird’s Nest Olympic stadium has become a tourist attraction, and still hosts major events. But the most startling example of Beijing’s transformation is the Central Business District, which at times looks more like downtown Chicago or Hong Kong when you stand beneath the towering skyscrapers and watch shiny new cars whizz up and down the six-lane highways.

The CBD is home to 15,000 companies and organisations, including 130 of the world’s top 500 firms. The CCTV building designed by Rem Koolhaas is still unoccupied as builders put the final touches to the interior, and opposite stands the burnt out husk of the Mandarin Oriental hotel, destroyed by a fire during Chinese New Year celebrations and now in a kind of limbo as the government works out what to do with this expensive wreck.

It does not detract too much from the overall impression of a city on the move, but it does serve as a warning, perhaps, against hubris. The combination of an understandable post-Olympic hangover and the onset of the world’s worst recession since the Great Depression should have been enough to cause major damage, but rather than going into a tailspin like other property markets around the world, Beijing and other Chinese cities are currently undergoing a boom.

There were signs of a price correction in the big cities, due in part to the strong, swift rise in prices during 2008 – in Beijing, for example, the market rose strongly ahead of the Olympics, and there was no way that those kind of price increases could be maintained. But the markets have proven incredibly resilient. This is because with the stock market, the property market has been one of the main beneficiaries of the stimulus plan, and initially much of the funding went into buying real estate, causing a swift rise in prices.

Property investment accounts for one-third of overall fixed-asset spending in China, and investment in real estate development accelerated in the first eight months of the year from the seven months to July, the government said in September, as new loans reached a record $1.2 trillion (€800 billion).

Residential sales rose 70 per cent in the first eight months of the year, while mortgage loans have risen by 94 per cent during the same period. House prices in the country’s 70 biggest cities rose 2 per cent in August – the fastest rate of expansion in 11 months. There are signs of major buyer interest in Beijing from Hong Kong and the regions of China, including Shanxi and Hebei provinces.

New bank loans account for nearly 25 per cent of gross domestic product (GDP), and Wei Jianing, an economist at the Development Research Center of the State Council, reckons that 30 per cent of these new bank loans have gone into property.

The investment bank UBS believes recovery in the property sector is crucial for sustained recovery in domestic demand, which is the main driver for the stimulus plan – to shore up the losses from the collapse of China’s export market. In order to stimulate demand for property, mortgage rates were cut, and the amount of deposit that has to be paid was cut.

Property taxes and fees were cut, and developers were given easier access to bank credit. There is so much money splashing around in the property market that they are now fears of another bubble, although opinion is sharply divided on this issue.

China property sales in September and October appear to be slowing compared to the first half of this year, owing partly to tightened mortgage requirements for second-home purchases. First-tier cities such as Shanghai and Beijing are expected to see a boom in the supply of residential property, so the market is expected to cool.

Property transactions in Beijing during the week-long National Day Holiday around October 1st touched a three-year low for the period, largely because of fast rising prices of property in the past few months. Many residential projects have seen price rises of over 50 per cent since April, and the market has slowed at this end, although demand at the higher end is still high.

“Asset bubbles will not burst if property prices are to stabilise. But if property prices continue to climb, bubbles will be more likely to burst,” said Gu Yunchang, deputy chairman of the China Real Estate Research Institute.

He believes that prices will be unpredictable, but the fact that the economy is growing in a sustainable way – China’s GDP is expected to expand by 8 per cent this year – means that there are no great threats on the horizon for the property market.

The rating agency Moody’s shares this view, and has raised its outlook for China’s residential property market outlook to stable from negative, on the back of what it sees as greater stability in the property area.

There have been structural changes in the market. Two years ago, the government introduced a number of measures to rein in demand in the property sector amid fears of overheating.

Now Beijing needs to allow more breathing space in the property market to help with recovery, and freeing up controls on the real estate sector is a crucial part of this.

People don’t hang around for long in China, and the focus is now on the next market. Residential prices in Shanghai, Hangzhou and Wenzhou, have reached record highs. And property agents are getting ready for a big increase in prices ahead of Shanghai’s 2010 World Expo. Bring on the next big China construction story.