Long-term potential for property sector in China still great, despite short-term blips

Recent reports that two foreign real estate firms, Treasury Holdings Group and Tishman Speyer, are selling their property and their respective stakes in Chinese joint ventures have triggered doubts on the real estate industry's prospects in China. Opinion remains divided on the issue, with some experts indicating that it points to a large-scale flight of foreign capital, while others term it as a special instance.

To understand the real picture in the real estate industry, it is important to find the answers to three important questions concerning the sector. The real issue is to fathom whether the real estate market will be prosperous or profitless in the long run. At the same time, it is also important to gauge the real reasons behind the exit of the two foreign realty firms.

It is also important to understand if there are any foreign realty companies that are expanding and how they are coping with the business.

Since April 2010, China has come out with a series of policies to control soaring property prices and to stabilize the market. The result has been a hard landing and sluggish market conditions that have extended well into the first quarter of this year.

But according to data published by China Real Estate Information Corporation, a research agency based in Shanghai, the average housing price in most of the major Chinese cities has risen since May this year. Not only have housing prices gone up, but the property sales volume and total investment have also rebounded.

The real estate recovery has been more visible in big cities. In August, first-hand housing sales volume in Beijing reached 1.5 million square meters, a new record. Shanghai also showed excellent price pickup with property sales rising from 0.2 million sq m in January to 1 million sq m in June.

Though monthly sales and price data indicate a short-term rebound, the long-term development potential is what should be enticing for foreign realty companies.

China is still in its mid-urbanization period. The rapid growth of the middle class has necessitated the need for new and large supplies of upgraded housing.

Such demand has, however, been suppressed by the curbs on the number of houses that an individual can own and also by the higher down-payment requirements. Besides this, there is also a severe shortage of commercial real estate in many cities and important areas.

Judging from the above, it is difficult to put a picture on why foreign realty companies would want to exit the sector in China.

Statistics show that foreign capital has been exiting the real estate sector since the second half of last year, after prices stopped rising. Most foreign investors had reaped rich dividends when they exited the sector last year, considering that many of them had entered China in 2004 or 2007, when prices were only one-third or half of the current level. The absence of price increases is one of the important reasons why foreign capital is moving out of the realty sector.

The foreign capital erosion was even more evident in the first half of this year. Statistics show that foreign investment in China's property sector from January to July this year was 22.8 billion yuan ($3.6 billion; 2.8 billion euros), down 54.3 percent over the same period last year.

The yuan has also stopped appreciating and has instead depreciated against the US dollar by 0.7 percent. This is another possible reason why foreign capital is seeking safer havens.

The tightened financial policies since 2010 have also crimped profit margins for many investors in the property sector. At the same time, the realty market is not showing any signs of a rapid pickup. So it is reasonable to see why international investors and even some domestic investors are retreating from the sector.

In the case of direct foreign investors who buy land and then develop the real estate, there are other reasons behind the moves to seek local partners or sell stakes. Foreign investors often have to bolster their real estate investments with funding support, as the industry is not mature enough.

Though some foreign companies have exited the sector, there are many others who are expanding in China.

CapitaLand, the Singapore-based real estate company, launched its Raffles City in Chengdu in September. During the first half of this year, the Singapore-based company committed $2.4 billion worth of new investment, of which 34 percent was focused on China. CapitaLand currently owns more than 120 projects in China with assets totaling 69.5 billion yuan.

Another Singapore-based real estate company, Yanlord Land, which focuses on residential property development, currently holds about 5 million square meters land stock in China and invested 3 billion yuan last year to buy 500,000 sq m of land in Zhuhai.

Despite China's rigorous real estate policies, a number of international property funds are still pouring money into the sector. Property development in first and advanced second-tier cities is still attractive, especially for quality office buildings and commercial buildings.

In many ways, 2012 will be remembered as the beginning of a new era for the Chinese real estate market, a year in which the market took the first steps to becoming more mature and standardized in the long run.

The author is a research manager at the research center of China Real Estate Information Corporation. The views expressed here are not necessarily those of China Daily.

(China Daily 10/19/2012 page7)