March 19, 2014 7:00 pm JST

China's property shares take hit as credit tightens

FUYUMI TAKEUCHI, NQN staff writer

     HONG KONG -- Uncertainty is growing over the real estate market in China, with government data showing a slowdown in land price gains and developers cutting prices for condominiums in second-tier cities.

     The market unrest was set off by a press report on Tuesday saying Zhejiang Xingrun Real Estate, a realty firm in Ningbo, Zhejiang Province, went belly up, sending ripples through the stock market and hitting shares in the sector.

Deflating balloon

Prices for newly built homes, excluding low-income housing, rose in February on the month in 57 of 70 major cities, down from 62 in January, according to data released Tuesday by China's National Bureau of Statistics. House prices also rose more slowly in such big cities as Beijing, Shanghai and Guangzhou.

    On the year, prices rose in 69 cities and dropped in one, unchanged from January, but the rate of inflation slowed from the previous month to 18.7% in Shanghai and 15.5% in Beijing. According to realtor Centaline Property Agency, the number of newly built and used homes sold in Beijing fell to a six-year low of 7,252 units in the first half of March.

     Home sales in March are seen as a leading indicator of annual trends. The latest data shows sales in the first half of March not only declined from a year earlier but also fell short of those in the off-season month of January. Property market watchers attribute the falloff to the government's credit tightening, which is aimed at cooling real estate prices, especially in big cities, and other measures such as the introduction of a real estate tax.

     Condo prices were lowered one after another in Hangzhou, Zhejiang Province, in February, triggering a nationwide wave of price cuts. Homes offered at a discount of 40% in Qinhuangdao, in Hebei Province, raised eyebrows in the industry. One newspaper reported that realty companies are retreating from smaller cities, particularly in coastal areas, setting off more alarm bells. Talk is swirling that banks will cut back on loans to property companies and that regulations on mortgage lending will be tightened.

Soft ground

On the Hong Kong stock market, mainland real estate issues have continued to sag. China Overseas Land and Investment and China Resources Land dropped by 5% and 4%, respectively, at one point Tuesday to set new 2013-2014 lows. China Vanke, China's biggest residential real estate developer, fell nearly 3% on the Shenzhen bourse.

     Despite this, many market players believe Chinese real estate prices will remain firm, especially in big cities. Prices will keep rising moderately over the long term, as the government tolerates yearly increases of 10%, and rising demand from China's urbanization props them up, said Mari Oshidari, a Hong Kong-based strategist with Japan's Okasan Securities Group.

     But Oshidari is less sanguine about the share prices of land developers, saying investor sentiment is unlikely to improve unless concerns ease over a possible plunge in the real estate market.

Smart money

Liu Lin, a Shanghai-based analyst at Aizawa Securities Investment Research Center, said although there are policy risks such as the planned increase in the scope of real estate tax and stricter rules on home loans, big-name realty companies such as China Vanke and China Overseas Land will survive. Nevertheless, investors should be cautious toward property firms with many development projects outside big cities, such as Country Garden Holdings, Liu said.

     The population of big cities in China continues to rise, while some provincial cities are shrinking. This is making it harder for small and midsize property developers to stay afloat, while better financed large real estate companies face fewer difficulties.

     Investors looking to profit from the Chinese real estate sector will have to be choosy when placing their bets.