Chinese housing turns as SOE’s booted, speculators bolt

Cross-posted from Investing in Chinese Stocks.

Easy money and perverse incentives combined to send real estate prices ever higher, driving land prices to all-time highs in 2016. SOEs were the among the worst actors. The central government told SOEs to get out of the land market in 2010, but they never left, becoming a key player in the 2015-2016 land bubble. Legitimate land needs of developers were swamped by a wave of speculative money looking for a new home following the stock market bust. Many state-owned firms anticipated a government forced consolidation wave, betting that getting bigger would increase their chances to be in the driver’s seat. A tidal wave of capital and these incentives combined for a land rush the likes of which preceded two of the past three real estate busts.

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Recently, media reports, most of the central enterprises did not implement the SASAC “check-out order” issued issued at the 2010 Lianghui. In 2016, of the the top 15 land buyers, central and state-owned enterprises took 8 spots.

Just the past year, especially in the first half of 2016, China’s land, especially high-priced land market is “national team” occupied half of the country.

Several factors drove land purchases by SOEs. First was the speculative nature of the bubble. After the stock market burst in June 2015, China’s wave of liquidity had to go somewhere. Some of it flowed through SOEs and investment firms into the land market.

In addition, in the first quarter of 2016, bank lending and social financing were unprecedented, with new loans of 4.61 trillion yuan and total social financing of 6.5 trillion yuan, all exceeding or close to the highest level in history. In the central control of local debt background, the central enterprises with its unique state-owned capital guarantee, collateral and other advantages, access to large-scale low-cost bank credit funds.

Second, land was considered a good asset that won’t drop in price, which is why firms such as Cinda, without core real estate business, were among those most aggressively buying land.

Third, driving up prices has a direct impact on balance sheets by driving up the value of land banks. Fourth, real estate SOEs are valued in part on assets. With the government contemplating consolidation and reorganization for SOEs, large land banks boosts a company’s valuation. Companies believed they would survive a forced consolidation wave if they were the larger firm:

After all, if a central enterprises do not have sufficient land reserves, and from the perspective of corporate valuation in a “weak”, most likely to be merged with other central enterprises. Only do large-scale at the same time, access to high prices to do high-cost, to discourage the main business for the real estate of the central enterprises to eat their enthusiasm. And once more “right to speak”, the dominant party may also be able to acquire other central enterprises “check out” assets.

And now comes the epilogue, heavily indebted firms with “frozen” land assets that will require far more capital to develop, but credit conditions tightening amid a government push for deleveraging and price stability in the real estate industry.

Meanwhile, government policies aimed at slowing the housing market are finally biting following rate hikes and tighter credit conditions. In Shenzhen, a relatively new group of white collar speculators used consumer credit to buy near the peak. As credit tightens and prices drop, many will end up losing money after taxes, fees and interest.

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“Huaxia Times” reporter recently survey found that, in the weather-vane market of Shenzhen, the existing housing market has seen some eager investors begin to cut prices 10% to 20%, while developers have special room price cuts up to 10%.

…High leverage is one of the most important factors in high house prices. What happens if administrators reduce leverage?

Xu Feng believes that the future in the supply side, the new housing market does not rule out a small number of developers based on financial pressure will let prices drop, in the existing housing market speculators sitting on several homes may drop the price and exit, hopefully the housing market will gradually stabilize.

According to our reporter learned that the developers of Shenzhen have special room price of the situation, such as Kaisa City Square, last year the price of 50,000 yuan / square meters, the current price of 45,000 to 48,000 yuan / square meter. While other developers are still in wait-and-see attitude, because the price of the record by the government’s strict control, the same real estate price record prices do not allow more than the previous price, since the second half of last year.

…According to the Shenzhen Municipal Planning Commission data, in September last year, the average new home price was 61,600 yuan / square meter, down to 54,931 yuan / square meter in January this year, down 7,000 yuan / square meter, in January 2017 Shenzhen new house turnover of only 1652 units, Month since the new month, decreased 23.6% mtm, down 70% yoy; existing homeg transactions 2747 sets, down 27.9% mtm, down over 80% yoy.

A new class of white collar speculators are feeling the pinch of tighter credit conditions:

Reporters found that the last two years to join the ranks of real estate speculators in Shenzhen, white-collar investors, are now under financial pressure, most of them used consumer loans and credit, or used a first home as collateral for a mortgage, to make a down payment on a second or third home. Especially investors who entered in the first half of 2016, they are stuck at the property market peak, including taxes and fees will sell at a loss.

Shenzhen home prices spiked nearly 60 percent in 2015 heralding the broader national bull market in 2016. As of December 2016, NBS reports Shenzhen new home prices were up 23.5 percent yoy and 49.5 percent from the start of 2015. Prices have been decelerating since mid-2016 and started falling month-on-month in October.