Cross-posted from Investing in Chinese Stocks.
Summary: HomeLink, a major realtor with offices all over China, got into the finance business a little over a year ago with little regulatory oversight. The Shanghai government is investigating. Putting the various reports posted below together, it appears the firm was engaged in risky lending practices at the very least. At the worst (in terms of financial risk, if not illegality), it was making high interest loans to house flippers, which one can assume it was earning commissions on, and funding these loans (which charged as much as 2% monthly interest in Shanghai) from its P2P finance platform, while also acting as the credit guarantor of those investment products.
Before we get to the credit mayhem unleashed by HomeLink, let’s look at soaring home prices in China, which serve as the backdrop for this madness.
iFeng: 京3月开盘项目预计涨幅为7%-35% 通州最高
Shenzhen property market madness continues, while the neighboring cities of Shenzhen, such as Huizhou, Dongguan, Zhongshan and other places housing prices also followed a deep area of Shenzhen together crazy, hit a new high.
Near Shenzhen, Dongguan Fenggang area, in January 2016 had 1043 turnover of new homes, house prices peaked more 17,907 yuan / square meter, an increase of nearly 60% yoy, up more than 12% mom.
Also appeared on the big gains in the price there Songshan Lake. Price from 10,000 yuan early last year to succeed, and now the average price has more than 18,000, has been in Dongguan Songshan Lake RATE peak.
Dongguan Bureau of Statistics calculated, in January 2016, the city’s new home sales price of 11,350 yuan / square meter, an increase of about 30%, up 6.3%.
The Huizhou Daya Bay Area is a deep rose, light Dragon City as an example, the city of light Long new push housing price reached 15,000 / square meter, the average price has broken the lake area 20,000, while its December the price is 12,000 yuan / square meter.
The average price of excellence with four eastern Cote d’Azur area from about the beginning of last year, now 5000 yuan rocketed to 12,000 yuan / square meter. Area gains were also other properties, ranging from 20-80%.
Yes, that last one is a 67% increase in one month. In Beijing, the increases aren’t as insane, but developers are seizing the moment. There are six developments coming to market in March and they have raised prices between 7% and 35%, the highest is in the Tongzhou district.
Beijing housing prices skyrocketing seem brewing. Beijing Asia Hao Guo Yi, director of marketing said, in March Beijing has 27 planned projects opening, there have been 7 old projects clearly raise the opening price, excepting a Haidian God project, the six projects have risen between 7% and 35%. The highest of the project in Tongzhou.
At least one analyst in Shenzhen is worried:
“These tools make real estate property market credit safety valve easy to be a breakthrough has accumulated risk.” Shenzhen Real Estate Research Center director Wang Feng said.
Many real estate industry in the 21st Century Business Herald said that recently occurred in Shanghai HomeLink is the purchase of financial leverage disputes exposure embodies.
Wang Feng said that the financial sector should act quickly, from the perspective of risk control, the implementation of differentiated credit policy, appropriate to tighten credit to prevent speculative demand for real estate over the use of financial leverage.
What happened in Shanghai?
JRJ.com: 链家金融业务门到底咋回事？模式普遍但风险多
Through financial platform to establish a pool of money that approach in the intermediary industry have a certain universality, the agency put the funds to the consumer who make short-term loans, high interest charges, the general term of about two weeks, this time with the housing transfer time difference is not too great, but there are many unpredictable risks in the housing sales process, appeared in the realtor funding problems have also occurred.
It sounds like HomeLink offered two-week high interest consumer loans to flip properties, but if something happened to slow up the sale and transfer, they run into problems as one party doesn’t have the cash to pay. Or the house is already leveraged and owed to someone else. The next sentence in the article:
Lack of laws and regulations, under government oversight, corporate finance innovative business models will inevitably hit the rocks.
Short-term high interest consumer loans to house flippers is an innovative business model that will eventually hit the rocks!
Shanghai Municipal Construction Committee February 24 to respond to the relevant store chain company exist non-standard business practices, it has been investigated, and the results will be published to the public. Currently, someone’s stores and online contract related to brokerage personnel qualification is suspended.
One industry insider commented that the rapid expansion of the company, control of the clerk of the wind can not be controlled within a reasonable range, the problem will be exposed sooner or later.
Carding public information difficult to find, the HomeLink financial business chain is intact, but as banks have again the same rigorous regulatory process, the implementation is not in place, the problem will occur. If the event of rapid expansion of management capabilities lag, the risk looming.
“Companies want to scale, the clerk to make money, eyeing the competition, to provide a rich variety of businesses that are a must. Exceed legal and moral bottom line things can only rely on the system and managed.” This name industry source said.
The industry insiders are not surprised there are already problems emerging:
The industry believes that the HomeLink outbreak is not accidental. There are some areas regulatory funds deposited in the Housing Authority designated account trading center, but the businesses are not many in the country, some cities are too many second-hand housing transactions because of a dispute, the parties to confirmation only after the introduction of regulatory capital account operations.
HomeLink has been getting a lot of press lately. They were covered in Nikkei in December 2015 with this unintentionally comic headline: Lianjia freshens up musty business of buying, selling homes in China
Big green signs began popping up like mushrooms across Shanghai this summer, marking the locations of Lianjia (“home link”) Real Estate Agency offices. Despite the stagnant Shanghai real estate market, the company quickly expanded its network by taking over, revamping and reopening realty offices that had gone out of business.
And then this:
In November 2014 Lianjia announced its entry into the financial industry, offering home loans to people who buy properties listed on its site. It is aiming for 20 billion yuan in transactions for 2015, and hopes to have its financial operations contribute 20% to total sales in the near future. The company is doing well in turbulent times and is worth keeping an eye on.
China Daily: Homelink probed over unauthorized sales
Homelink Real Estate Agency Co, Shanghai’s largest chain of second-hand property agents, is under investigation by the city’s housing regulator for allegedly selling financial products without authorization.
A circular issued by the regulator said the probe started earlier this month, and focused on what it called “financial products” being sold to home sellers, based on allowing owners to raise cash by mortgaging properties that are to be sold.
CRIEnglish: Authorities Warn of Dodgy Realtors
In one case, Huang paid 2.8 million yuan in a down payment for a 4 million yuan apartment in Shanghai’s Hongkou District. But it later turned out the apartment was under a seizure order from a local court, as the owner owed around 150 million yuan in business-related debt.
Huang said his real estate broker assured him the owner was in a strong financial position and was selling the apartment to buy a better one. But he said that all changed after he signed his purchase agreement.
“After the contract was signed, they showed me a rewritten house ownership report, which showed the house had been used as collateral to borrow money. I refused to continue with the contract, but they warned I would lose my collateral if I backed out of the contract.”
He said the company, HomeLink, has refused to accept responsibility. Instead, he said the firm has offered to lend him more than 1 million yuan to keep the deal alive.
But in doing so, he said the firm wanted roughly 20 percent annual interest, which is far above market rates. In the end, this would have put the property above market value.
Hang on, were not at the best part yet. Home Link want to build a ￥1 trillion empire and to get there, it acted as its own credit guarantor on its P2P investment products, which run to nearly ￥18 billion. Sina: 揭开万亿链家帝国金融迷雾：自己给自己担保的P2P
But some illegal operation of these services exist, they lay hidden in Homelink’s ambitious trillion yuan empire. Relying on the back of massive financial transactions clever build industry chain, its Vital finally surfaced in public view in a series of events. Some even asked: Homelink will be the next e zubao?
What is e zubao? CNN: China cracks down on alleged $7.6 billion Ponzi scheme
Chinese authorities have arrested more than 20 suspects who are accused of involvement in a massive Ponzi scheme that allegedly swindled hundreds of thousands people out of billions of dollars.
The arrests reported Monday by state media relate to E-zubao, a peer-to-peer lending platform that promised investors attractive returns of as much as 15% when it launched a year and a half ago.
But the man behind the platform, Ding Ning, is now accused of gobbling up new capital largely in order to pay off existing investors, according to the official Chinese news agency Xinhua. Ding and 20 others have been arrested on suspicion of embezzling 50 billion yuan ($7.6 billion) from around 900,000 investors.
Back to the Sina article on HomeLink:
If we say “their own guarantee” P2P mode only exposed the chain of home finance certain risks, then run behind the years of short-term financing business is questionable.
News interface to get a “chain of home loan business process” shows the current chain of home-mortgage loans and personal funds to advance class borrowers involved in traffic of 2% monthly interest charges in the Shanghai region, the process is clearly marked “all borrowers They are to be specified in the application P2P issuing formalities.” This means that the chain of home loan business now undertake most will be packaged into the P2P product for sale online.
It’s as if every single insane credit story that has popped up over the past three years was rolled into one. Real estate, P2P lending, loan sharking, credit guarantees, possible fraud and more. If the reports are even relatively close to accurate and this blows up, the impact will be huge.
Meanwhile, in conventional credit, banks are speeding up the processing of mortgage applications as monetary emissions flow into housing. Banks had slowed the lending process amid falling home prices and rising credit risk in 2014 and 2015, but now it takes 2 to 3 days to apply and 10 days to receive funds.
“The average of 2 to 3 days to complete approval, 10 days can lend.” A listed bank’s Qingdao branch employee told the “Daily News” reporter, real estate market is very hot, personal loans also extraordinarily active.
Credit standards are obviously being loosened, even as banks require lower down payments (20%) and offer discounts of 15-18% off the benchmark rate.
In February, the central bank and the China Banking Regulatory Commission issued a notice once again, without the implementation of the “restriction” measures the city, households first purchase commercial individual housing loans ordinary housing, the minimum down payment ratio of 25% in principle, can float down around 5 percentage points.
After the mortgage New Deal, a number of banks to respond positively. Such as ICBC official said, the bank does not implement the “restriction” city households for the first time to buy ordinary housing, commercial individual housing loans, the minimum down payment ratio of 25% in principle, all branches floating down 5 according to local conditions percentage points; to have a set of houses and a corresponding purchase loans outstanding of households, in order to improve living conditions apply for commercial individual housing loans again to purchase ordinary housing, the minimum down payment ratio of not less than 30%.
“The first suite down to the lowest possible into two, each row there will be some conditions, such as open mobile banking or online banking.” The stock line sources said.
It is understood that in the Beijing area, the implementation of the optimal number of banks for the first home interest rate 15% off the benchmark rate, individual banks subject to certain conditions lower it to 18% off.
No worries though, because even though credit risks are rising and banks are cutting off credit to business, the risk on mortgages and personal loans is lower:
Asset quality of commercial banks in the downlink period, the personal loans although limited gains, but lower risk, favored also normal. A Beijing branch of a listed bank said that the current line in personal loans to credit arrangements are more abundant, the current uncertain economic situation, a number of small and micro business customers credit has tightened, personal business focus on mortgages and consumers.
Late last year due to strong sales of real estate, mortgage demand has soared.
“The beginning of a more relaxed bank credit, and real estate sales are also booming, personal loans may be the size will continue to rise for some time.” The stock line of Beijing Branch sources said, which is consistent with the direction of regulators encouraged.
This will work unless there’s an actual recession underway, in which case the recession will spread to services and finally show up in income, and then the consumer loans blow up too.
Evidence already points to trouble: China Unbalancing As Recession Hits Services; Industrial Support Courts Disaster and also: China Growth Industry: Bad Debt Collection and Management.
And local authorities want moar:
Around the market “to stock” actions, taxation, monetary policy has become a common means. Promote off-site loans, raising the loan amount, to extend the loan period, relax …… these extraction conditions favorable policies to buyers in many places has become fund the New Deal “standard.” Some cities choose direct subsidies given to buyers.
There are all sorts of plans, various ways to funnel money into the sector, including changing the use of the property to rentals, public rentals, and commercial space, often with tax subsidies:
Many provinces and positive efforts to cultivate the rental market, or the stock of commercial housing into tourism or retirement real estate, entrepreneurial workshops and so on.
For example, Jiangxi encourage qualified real estate development companies will hold their stock listings to social rent, lease development and establishment of an integrated mode of operation, and to encourage large-scale leasing companies without affecting the structural safety of buildings premise of the housing dwelling size structure to be adjusted to meet the needs of small and medium size rental.
Fujian enterprises to invest in the purchase of rental housing stock, rental management services for enterprises within three years of the business tax, property tax, income tax shall be appropriately rewarded. Shandong clear that the real estate leasing as a key industry to nurture, encourage rental housing property management companies run business, organizations and institutions in order to allow the settlement of leasing office space gap.
Inner Mongolia also suggested that commercial housing stock in large units more areas can be transformed into a large residential units suitable for enterprises and institutions to support public rental, business students need public rental housing, and included in the scope of government subsidies.
It is worth noting that in some places still with the trend of “public entrepreneurship and innovation,” the inventory of commercial housing into entrepreneurship workshop or record passenger space.
That might work in areas with overbuilt residential housing, but not areas already overbuilt with commercial office space and industrial parks.
Then there are the straight subsidies:
Sichuan Meishan City of qualified buyers, who buy less than 144 square meters within the city of new commodity housing, can enjoy the subsidy of 500 yuan per square meter; Hangzhou Fuyang District education subsidies according to the buyers, the higher the degree of the more subsidies for full-time undergraduate education buyers, mortgage subsidy of 1.5%, the maximum not more than 30,000 yuan; Anyang City, Henan Province, the local residents to purchase an ordinary commodity housing within the city limits, you can directly enjoy twenty thousand yuan housing subsidies; housing subsidies in accordance with the Lianjiang County in Fujian Province, “an area gradient” principle, residents purchased less than 60 square meters of commercial housing, subsidies for 12,000 yuan each, 60 to 100 square meters, each 22,000 yuan subsidy. iFeng: 60多个城市直接补贴购房者 多为三四线城市
In sum, no new net construction but a raging price bubble.
