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China’s Residential Market – China’s Residential Market – Potential Profit or Pure Hype?Potential Profit or Pure Hype?
Nicholas BrookeNicholas Brooke, , FRICS FHKISFRICS FHKIS
Chairman, Professional Property Services LtdChairman, Professional Property Services Ltd
25 May 200725 May 2007
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The RealityThe Reality
Yes, it’s about profitYes, it’s about profit
Yes, it’s about market momentumYes, it’s about market momentum
BUTBUT
Much more to the equation than thisMuch more to the equation than this
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The RealityThe Reality
Linked to:Linked to:The stage that China has reached in its The stage that China has reached in its economic developmenteconomic developmentWealth now accruing to many who have never Wealth now accruing to many who have never had it beforehad it before– Aspirations to ownAspirations to own– Aspiration to invest (few outlets previously)Aspiration to invest (few outlets previously)
Complicated by Government attempts to cool the Complicated by Government attempts to cool the market by constraining demandmarket by constraining demand
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Profit / Supply Side Profit / Supply Side of the Equationof the Equation
Narrowing margins due to higher land Narrowing margins due to higher land costs/compression of returnscosts/compression of returns
Shift in funding profile/more difficult to Shift in funding profile/more difficult to raise financeraise finance
Small/medium developers being squeezed Small/medium developers being squeezed out/industry rationalisationout/industry rationalisation
Shift from margin to volume gameShift from margin to volume game
Land appreciation tax and other leviesLand appreciation tax and other levies
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Hype / Demand Side Hype / Demand Side of the Equationof the Equation
Restrictions on foreign investors / Restrictions on foreign investors / purchaserspurchasers
Property tax – capital gainsProperty tax – capital gains
Mixed pictureMixed picture– City by city but still strong underlying City by city but still strong underlying
fundamentalsfundamentals
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Other Elements of the EquationOther Elements of the Equation
Government’s wish to avoid further Government’s wish to avoid further overheating and to cool the marketoverheating and to cool the market
New Property LawNew Property Law
Stock market boom/bubbleStock market boom/bubble– Alternative and easier form of investment Alternative and easier form of investment
taking a lot speculative liquidity out of property taking a lot speculative liquidity out of property marketmarket
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Other Elements of the EquationOther Elements of the Equation
New investment rules not uniformly New investment rules not uniformly interpreted or enforcedinterpreted or enforced– Small units, market mix, banned “luxury” Small units, market mix, banned “luxury”
development in certain circumstancesdevelopment in certain circumstances
Potential further taxation (personal and Potential further taxation (personal and corporate)corporate)
Imposition of restrictions on lending at Imposition of restrictions on lending at project and individual (mortgage) levelsproject and individual (mortgage) levels
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Other Elements of the EquationOther Elements of the Equation
Imposition of requirements/conditions on Imposition of requirements/conditions on foreign lendersforeign lendersGovernment selling land for affordable Government selling land for affordable housing with maximum unit sales pricehousing with maximum unit sales priceMany Hong Kong developers entered the Many Hong Kong developers entered the market, particularly land bankingmarket, particularly land bankingStill immature/imperfect secondary marketStill immature/imperfect secondary marketPotential knock-on impact of stock market Potential knock-on impact of stock market correctioncorrection
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OutcomesOutcomes
Continuation of high land price policy – Continuation of high land price policy – competition and control reasonscompetition and control reasons
Local and Hong Kong developers Local and Hong Kong developers competing for projectscompeting for projects
Potential for corporate activity (JV / Potential for corporate activity (JV / acquisition) particularly in case of those acquisition) particularly in case of those companies with historic land bankscompanies with historic land banks
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OutcomesOutcomes
Some withdrawals form the market (e.g. Some withdrawals form the market (e.g. SOHO) because of uncertainties SOHO) because of uncertainties surrounding Government interventionsurrounding Government intervention
Further industry rationalisation – big will Further industry rationalisation – big will get biggerget bigger
More innovative mortgage products More innovative mortgage products possiblepossible
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Outcomes Outcomes
Even less local funding sourcesEven less local funding sources– Greater opportunities for involvement of foreign Greater opportunities for involvement of foreign
lenders on project and pool basislenders on project and pool basis– But not all will take risk of further Government But not all will take risk of further Government
restrictionsrestrictions
Potential for correction/stock market / property Potential for correction/stock market / property market “bubble” crisismarket “bubble” crisis– Challenge for Government to manage a major Challenge for Government to manage a major
correctioncorrection– Negative equity situationNegative equity situation– Banks could end up owning many residential unitsBanks could end up owning many residential units
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OutcomesOutcomes
Demand for greater market transparency Demand for greater market transparency from those in the market for the long termfrom those in the market for the long term
Exit strategies impacted by secondary Exit strategies impacted by secondary market fragilitymarket fragility
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Overall ConclusionsOverall Conclusions
Jury is still out butJury is still out but– Certainly most of hype now goneCertainly most of hype now gone– Profits really being earnedProfits really being earned
Shanghai perceived by many as most Shanghai perceived by many as most vulnerable but strong GDP performance vulnerable but strong GDP performance and growing services industryand growing services industry
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Overall ConclusionsOverall Conclusions
Second/third tier cities could be more as Second/third tier cities could be more as riskrisk– Not under the microscope as in Not under the microscope as in
Beijing/ShanghaiBeijing/Shanghai– Perhaps greater likelihood of irregularitiesPerhaps greater likelihood of irregularities
Thank youThank you
Professional Property Professional Property Services LimitedServices Limited
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