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Property

Online real estate auctions surge among China's well-to-do

Cyberbidders exploit legal loophole in tightly regulated property market

A condominium unit in Xianxia Lu, a residential area in western Shanghai, drew 90 bids in an auction.

SHANGHAI -- Internet auctions of real estate have taken off in China as the affluent make the most of the laxer rules for auctions compared with conventional transactions.

A 20-year-old condominium unit in Xianxia Lu, a residential area in western Shanghai, drew 90 bids in an auction that ran from Monday to Thursday last week. The race to purchase the property turned into a dead heat.

The 180-sq.-meter unit eventually sold for 15.95 million yuan ($2.4 million). The final price tag amounted to nearly 50% more than the initial quote of 10.85 million yuan.

"It's on par with the market value, if not slightly lower," a source from a nearby real estate firm said.

A condo in Beijing's Daxing district auctioned for 7.66 million yuan, up about 40% from the initial 5.39 million yuan quote.

This year, more than 490,000 properties were listed on internet auctions. The volume is quintuple the count from 2015, when fewer than 100,000 properties were listed.

Taobao, the e-commerce portal operated by Alibaba Group Holding, is known to command a high share in the online auction market. Since 2012, Taobao has partnered with courts to list items for bid.

The platform handles auctions not only real estate, but also for automobiles, as well as for production equipment, warehouses and trademarks put up for sale by bankrupt businesses.

Online real estate auctions have drawn individuals partly because the properties can be bought cheaply. Many listed properties start bids at 20% to 30% below the appraised value.

Another reason is that bidders have opportunities to get their hands on central-city properties in Shanghai, Beijing and Shenzhen that are otherwise difficult to come by.

The bigger motivation for online bidding for homes is that it is exempt from transaction restrictions.

In many large cities, buyers normally have to pay social insurance payments over a set period before purchasing properties. Property acquisitions are often limited to a few units per household.

These measures were put in place to curb real estate speculation and date back to 2016 and 2017, when housing prices spiked.

But wealthy Chinese have a strong appetite for property investing, especially with the government moving against offshore investment. Financial authorities appear to have intentionally held off on applying property purchasing limitations to auctions in the interest of lifting demand for such real estate.

It is anticipated that banks are looking to get into the property auction game so that they can write off nonperforming loans. Real estate is used as collateral for bank loans.

Chinese commercial banks were on the hook for more than 2.8 trillion yuan in nonperforming loans at the end of September, up about 20% from the end of 2019. Loans at risk of going bad amounted to 3.8 trillion yuan.

The government ordered banks to support finances at smaller businesses as part of the stimulus policy to soften the coronavirus impact. These measures, which include extensions on debt payments, expire in the first half of 2021.

Once this happens, a string of enterprises are strongly likely to fail. Nonperforming loans could potentially balloon by 300 billion to 700 billion yuan, according to China Securities.

The financial authorities are scrambling to respond. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, has said that 3.4 trillion yuan in nonperforming debt will be disposed of by the banking industry in 2020.

This is about 50% higher than the 2.3 trillion yuan of 2019. Internet auctions will likely play a bigger role in getting rid of the debt.

But while buyers are easy to find for real estate in large metropolises, inventories have swelled for newly built residential units in outlying areas. Auctions have ended poorly for many such properties.

Of 1.35 million housing units that have been listed for auctions, close to 10% have had theirs canceled or withdrawn. More than a few properties go through multiple auctions before finally being sold. It appears too early to consider internet auctions a cure for the bad-debt blues.

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