The current state of China’s property market still looks risky to investors.
Although the authorities continue to take measures aimed at curbing house prices, the most recent reportedly being a price cap on new house sales, Beijing's November land auction resulted in developers buying five land parcels at record-high prices.
New house prices across China’s 50 major cities rose in January on average for a 20th consecutive month, data from the National Bureau of Statistics of China shows, and there appears to be little let-up on the horizon. A Moody’s January 28 report expects property price increases across China’s 70 major cities in 2014, albeit at a slower rate.
“There is a higher and higher likelihood [of] an overpriced and over-liquid market in China’s real estate sector,” Ren added.
As of last September, total lending to the real estate sector by major financial institutions (including foreign banks) amounted to Rmb14.2 trillion ($2.3 trillion), a 19% rise on three months earlier, according to a research report by Li Xunlei, a vice president and chief economist with Haitong Securities.
Adding off-balance sheet financing and offshore bond issues would take the total to Rmb24 trillion, according to Li, potentially creating a massive burden for the financial system in the event of a crash.
However, Ren does not anticipate any property crash or serious recession in the world’s second largest economy, which he believes continues to be underpinned by huge and persistent demand from a fast-growing middle class with few investment alternatives.
The growth rate of 50 Chinese cities has slowed both on a year-on-year and a month-on-month basis, according to the NBSC. Moody’s estimated that contracted sales growth for the national market will decrease from 26.6% last year to 10% this year. It also said tighter regulatory controls and a slowdown in the economy will temper the price growth.
One way Ren suggests to make China’s property market healthier would be to transform in a more institutionalised direction. And by more institutionalised he means more professional.
In this respect, some aspects of the market are already headed in that direction. Retail investors used to dominate as it used to be easy for them to make money in the market. But it’s getting harder now due to regulation and they need independent professionals to work on their behalf.
Retail investors face more difficulties than before, including the increasing transaction and borrowing costs, lower returns and risk of falling prices. Property has been less favoured by retail investors as an investment choice, dropping from top to second behind funds and wealth management products, according to a central bank survey in the fourth quarter.
Property developers also need to become more specialised and to collaborate more with partners with a deep knowledge of niche sectors.
It also means that developers, especially those who have borrowed too much, should strengthen their internal risk control management in case they suffer from increased borrowing costs or lower earnings due to the slowdown in house price growth.
In the meantime, Ren still values the investment potential of shopping malls and office buildings. He says that high-end residential properties in Chinese second or third-tier cities have great potential.
“Waiting for opportunities in a defensive way, that’s my advice for investing in the current market,” said Ren.