Real estate booms in China's small cities, but construction outpaces demand

Shuoao International Holdings

30/07/2017 03:31

* Home-buying demand spills over from bigger cities like 
Shanghai 
    * Small cities such as Bengbu have fewer purchase 
restrictions 
    * Local developers boost construction to meet rising demand 
    * Signs of slowing sales momentum as growth considered 
unsustainable 
 
    By Yawen Chen and Ryan Woo 
    BENGBU, China, July 30 (Reuters) - Luxury lakeside homes and 
high-rise condominiums are coming up fast in China's sleepy 
inland town of Bengbu, a clear sign that a home-buying frenzy 
sweeping across the country's major metropolises and provincial 
capitals has reached even its smaller cities. 
    The increase in demand is welcome news for smaller cities 
that have a massive overhang of unsold houses left from the last 
real estate downturn three years ago. However, the surge in 
construction threatens to outpace or match the increased demand 
for housing, leaving housing inventories untouched. 
    That will be a worry for China's policymakers, who want to 
keep the real estate market stable ahead of a 
once-every-five-years Communist Party congress in the autumn 
that will see a reshuffle of senior leaders.    
    The property market in Bengbu, once a fishing village on the 
banks of the Huai River and Lake Longzi, has been among the top 
three fastest-growing in China's 70 main cities in recent months 
although the local economy is soft - the region's main 
glass-making industry has been hit by the general growth 
slowdown. 
    Property analysts say property demand in such smaller cities 
has surged because local governments offer cheap credit and 
impose next to no restrictions, unlike in the bigger cities, 
where defences are in place to fend off speculation and prevent 
formation of property bubbles. 
    Real estate in tier-3 and tier-4 cities, ranked below the 
major metropolises and the provincial capitals, is where the 
growth is now, analysts say, but the frenzied construction means 
the stock of unsold homes has remained stubbornly high. 
    Nearly 50 million square metres of real estate, or about 
550,000 homes, were sold in 27 tier-3 cities in January-May this 
year, which should have reduced inventories by 45 percent, 
according to Reuters calculations based on a private estimate of 
inventories in China's main small cities.  
    In reality, inventories only dropped 7.1 percent to 102 
million sq m, equivalent to 1.1 million homes, data by 
Shanghai-based E-house China R&D Institute showed, because of 
new construction.  
    Prices for new homes in Bengbu surged 3.4 percent on-month 
in May, the highest among all 70 major cities, data from the 
Statistics Bureau showed. Bengbu ranked second-highest in April 
and third-highest in June. 
    "We think the market will continue to be good even though we 
don't expect a drastic rise in prices anymore," said a manager 
surnamed Huang at Bengbu Jinhui Real Estate, a private developer 
that has actively bought land rights in Bengbu. 
    A unit of Kingyard Real Estate, the firm successfully bid 
1.39 billion yuan ($205.4 million) for a nearly 12,000 sq m (3 
acres) parcel of land in Bengbu in May, more than double the 
starting price, where it plans to build residential housing. 
 
    BENGBU'S GLUT 
    In Bengbu, housing inventories hit a high of 4.84 million sq 
m in January 2016, which at the time would have taken more than 
40 months to clear.  
    But despite sales jumping almost 70 percent to about 1.47 
million sq m in the first half, the excess stock only decreased 
about 4 percent to 4.39 million sq m as of May, E-house's latest 
estimates showed, due to new supplies entering the market.  
    Developers obtained pre-sale permits to sell 1.12 million sq 
m of new projects in the first half, with permits in June up 
more than 400 percent from a year earlier, according to Reuters 
calculations based on Bengbu housing bureau data.  
    The propaganda office of the Bengbu government declined to 
comment, and phone calls to the city's housing bureau went 
unanswered. 
    There are already signs demand is slowing in Bengbu.  
    Property prices have jumped almost 50 percent since the 
start of the year for some new units to around 7,500 yuan 
($1,108) per sq m, according to local agents.  
    While that is about one-tenth of prices in big cities like 
Beijing and Shanghai, the price is high for a city like Bengbu.  
    At those prices, a two-bedroom apartment of 90 sq m would 
cost about 675,000 yuan ($99,956) before tax, equivalent to 12 
years of average pay in the city. 
    Many recent buyers are locals originally from Bengbu and its 
neighbouring counties but have gone to more affluent cities for 
work, said Shen Zhichao, sales manager for Amber New World, a 
housing project under Hefei Urban Construction  HEFEIA.UL . 
    Having seen the rapid price gains in bigger cities, they are 
rushing back to secure apartments before even those get too 
exorbitant. 
    "I feel too much potential demand has already been 
front-loaded to the first half of the year," Shen said.  
    Bengbu's government capped prices of new projects at 5,800 
yuan ($859.45) per sq m on May 15, as the city became the 
fastest-growing market in China that month.  
    The new rule does not affect housing projects that have been 
granted a selling permit. Some developers have also sought to 
offer cheaper units on lower floors so the average selling price 
for the entire project doesn't exceed the cap.  
     
    DATA 'MYTHS' 
    The hidden danger, analysts say, is that real estate 
inventories are often higher than indicated by official figures. 
    Official inventory data only counts completed homes, while 
private estimates include homes that are being built but not 
completed yet.  
    Official data showed nationwide inventories stood at 646 
million sq m as of end-June. Private estimates, which tend to 
lag official data, can be several times bigger than that.  
    A Bank of China estimate that includes not-yet-built 
projects shows China's real estate inventories stood at 8.28 
billion sq m at end-2016, most of which - 5.8 billion - in 
tier-three and four cities. 
($1 = 6.7530 Chinese yuan renminbi) 
 
 (Editing by Raju Gopalakrishnan) 
 ((yawen.chen@thomsonreuters.com; +86 10 6627 1207; Reuters 
Messaging: yawen.chen.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA ECONOMY/SMALLCITIES