China Residential Market by TL, The Value Edge
From the latest results from the National Bureau of Statistics of China, we can observe that in terms of supply of real estate, the Central Government’s policy is working. China’s real estate sector slowed in May where investments in real estate rose 14.7% during the first five months of 2014, slowing from the overall rate of 16.4% recorded during the period from January to April 2014. Furthermore, we see new construction starts decreasing 18.6% during the period of January to May compared to that of last year.
However, if one were to look deeper, the government’s policy may not be working that well. Looking at demand, we see home sales for May alone to be down 11% compared to that of last year. This translates to an 8.5% slowdown in property sales from the period of January to May 2014, compared to that of last year. Furthermore, Soufun reported earlier this month that 62% of China’s cities recording falling home prices for the month of May. A survey by China Index Academy, a unit of, saw average home prices dropping 0.3% in May compared to April. Furthermore, it was previously reported that only home prices in smaller towns in China saw home prices falling. However, we see home prices in first tier cities, where homes in Shanghai Commercial Centre saw prices fall by 0.4% compared to last month. Among China’s 10 largest cities, Nanjing saw the biggest drop in May of approximately 1.4% and only 2 cities recorded increases in home prices – Bejing and Tianjin.
While we see the slowdown in supply of real estate, this is partly attributable to problems developers are facing. Developers are facing the problem of tighter cash flows, where housing brokers complain about unpaid commissions.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
A third of all developers that we are helping sell projects have not paid us commission fees according to the payment schedule
Director of Hopefluent Group Holdings, Fu Wai-Chung commented. The firm operates 280 branches across the Mainland, and was marketing about 600-700 property projects.
Developers are deferring their payment from 90 to 120 days as credit tightening and a decline in property sales hurt their cash flow
Furthermore, Head of Residential Sector at DTZ Greater China, Alan Chiang Sheung-Lai agreed that their company was in the same boat.
Small developers are not only the ones that owe us money, but also major players
Chairman of Centaline China’s parent Centaline Group, said. Developers owed the firm RMB1bn in unpaid commissions for this year, lifting its accounts receivable to RMB2bn. Furthermore, one such developer, Huizhou-based Guang Group had paid Centaline commissions in the form of several flats, and they had sell them at below-market prices.
Despite it all, an official from China’s think tank said that the current real estate market correction is under control and that the country’s economy is strong enough to manage its impact.
Based on our research, risks for the property market still controllable
Vice President of the China Academy of Social Sciences, Li Yang commented. Furthermore, given how the value of properties held by individuals is still much higher than their mortgage obligations, this limits the risk of panic selling.
I attended a happy hour for professionals within the real estate industry yesterday night. The surprising thing was that I actually met other professionals from other sectors such as someone from uber, the hospitality sector etc, which was really interesting. One could actually see how interconnected industries are, where I even saw someone from the carpet industry attending this social event to network with property developers. Anyway all that aside, after talking to the industry’s professionals, it is their view that it is unlikely that China would enter into a recession, where the property bubble will not have repercussions as bad as that of USA. Furthermore, the Chinese government has more fiscal might to bail companies out in the event of such a scenario. That said, I won’t be better against this from happening.