Outlook for mainland property remains promising
Updated: 2011-01-26 07:03
(HK Edition)
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Various issues surrounding China's property market have been a hot topic in recent years. Despite concerns about tightening policies as well as supply, we still believe the sector has become a vital part of the nation's economy and that its long-term prospects remain promising.
First of all, accelerating urbanization is one of the key themes in the country's 12th Five-year Plan, especially for those in second and third-tier cities. Other relevant measures include increasing public-housing supply for low and medium-income earners, and promoting stable and sustainable growth in the private property sector. In our view, increasing public housing supply will have little impact on demand for mid-range to high-end properties, and should in fact facilitate a more stable private property sector in the long term.
From a supply point of view, housing supply is expected to rise 60 percent year-on-year (YoY) in 2011, mostly in second and third-tier cities. However, the supply growth is not all bad news for developers. In the first half of 2009, China's property sales by volumes increased much more than expected. Most developers expanded their construction plans in the second half of 2009, supply from which will come to the market in 2011. According to China Real Estate Index System - a Chinese property database covering 17 major mainland cities, nationwide supply will rise 60 percent to 1.2 billion square meters in 2011 compared with 2010.
Supply in the second and third-tier cities should post stronger growth than in first-tier cities this year. However, not every city will see a supply increase of similar amplitude. For instance, among first-tier cities, Beijing's supply in 2011 is expected to rise 50 percent YoY, while that in Shenzhen and Shanghai should see an increase of around 20-30 percent YoY. Guangzhou's supply is likely to rise about 157 percent YoY after a significant decline of around 46 percent in 2010. On the other hand, many second and third-tier cities should see strong supply growth in 2011 of more than 100 percent. In fact, we have examined supply to demand (S/D) ratio in 27 major cities, and found that Chengdu, Haikou, Shanghai and Shenzhen still have a supply shortage, with S/D ratios below 1. Elsewhere, supply increases are likely to be strong, especially in second and third-tier cities, but oversupply seems unlikely given the rapid demand growth. Also, oversupply is most likely to affect Wuhan, Tianjin, Taiyuan, Beijing, Dalian and Suzhou, and pricing pressure will be the most intense in Tianjin, Wuhan and Taiyuan.
Whether supply growth translates into oversupply or not depends on demand. We estimate overall property demand growth at 5 percent YoY in 2011, based on the average of the past three years. This follows a steep drop in demand in 2008, a very sharp rebound in 2009 and a moderate increase in demand in 2010. China's overall S/D ratio has reached 1.65x, but there are still a few cities expecting supply shortages in 2011.
However, demand dynamics vary across different cities. For example, urbanization remains low in second and third-tier cities, which means upgrade demand has just started compared with first-tier cities where urbanization is much higher and upgrade demand already emerged before 2007. As such, using a one-year S/D ratio may not give a complete picture.
Besides the supply factor, affordability is another often questioned issue. Our view is that it should stay reasonable for the most part in 2011, except in a few first and second-tier cities. Looking at both affordability and S/D ratios, we see only five cities (Tianjin, Wuhan, Taiyuan, Beijing and Dalian) facing intense property-price pressure in 2011. Elsewhere, even though affordability ratios in a number of cities are above international standards, we expect the inflationary environment in 2011 to support demand, especially in cities with tight supply, such as Shanghai, Shenzhen, Chengdu, Xi'an, Nanjing, Haikou and Guiyang.
Housing is less affordable in most first-tier cities and a few second-tier cities, including Beijing, Shanghai, Shenzhen, Hangzhou, Guangzhou and Tianjin where affordability levels are at ratios between 8.3x and 16.4x (higher than the national average of 6.7x and the international standard of 6-8x). Affordability generally remains reasonable elsewhere in China.
Due to expectations of high inflation in 2011, we see some leeway for property prices to rise in other cities where properties appear less affordable compared to international standards. This will likely encourage excessive liquidity to remain invested in property as hedges against inflation. As such, we expect demand to remain strong, especially in cities where supply is tight, such as Shanghai, Shenzhen, Chengdu, Xi'an, Nanjing, Haikou and Guiyang.
Peter Pak is executive director of BOCI Research Limited. The opinions expressed here are entirely his own and do not represent BOCI or any other affiliated companies within the group. Nothing in this article constitutes an investment recommendation.
(HK Edition 01/26/2011 page2)