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Time For Another Look At Five New Measures In China

Thursday, May 9th, 2013

It has been over two months since the Central Government announced the “Five New Measures” in early March. How have these measures worked so far? The new round of tightening policies was aimed at taming housing price growth by addressing several key issues, such as continuing to implement HPRs, increasing the supply of small- to medium-sized apartments and discouraging investment purchases by increasing transaction costs. As we stated right after the announcement, the new measures remained consistent with the structure of the existing policy regime, and the emphasis was placed on the detailed implementation of the measures at the local level.

Following the announcement from the Central Government, many city governments waited until the end of March to reveal their local implementation details. However, most of them failed to address some of the key issues, and Hainan Province even refused to implement the new measures. At the time of writing this article, only the Beijing city government had enforced the implementation of a 20% capital gains tax, while the governments of cities like Shanghai and Guangzhou have not given an explicit timetable for implementation.

It has long been our view that there are sufficient government policies in place in China to help stabilise the market. It is the lack of enforcement and strict implementation of those policies that has led to the problem of prices rising too quickly. A good example is the HPRs, which were introduced in over 20 cities in 2011 but got gradually loosened throughout 2012. Local governments at the city level have been very reluctant to enforce national policies as their revenues have a heavy dependence on the real estate industry, with land sales being a key revenue source.

Sales volume across the major cities started trending downward in April. We believe this will result in a stabilisation in prices over the next few months if sales remain subdued. However, this volume slowdown is due to a spike in activity before the local governments made their announcements at the end of March rather than because enforcement and implementation are more strict. Over the past two years, the market has been driven primarily by first-time homebuyers and upgraders, who are the participants the government should and will continue to support. Investors and speculators can be kept out of the market as long as the existing measures are enforced and implemented strictly at the local level. An additional policy we think is needed for the long-term sustainability of the sector is the property tax, which would help rationalise purchase incentives and create a steady revenue stream for local governments, reducing their reliance on land sales.

About the author
Joe Zhou is the Head of Research for Jones Lang LaSalle in Shanghai.

Posted in China, Public Policy, Residential Research | No Comments »

Is Vietnam’s Residential Market Near The Bottom Yet?

Friday, April 19th, 2013

For the overall market, not really! For certain segments, maybe!

Being in the real estate advisory business, especially in research, we have been asked about market bottoming many times. After all, it is the real estate and construction industries that have put a drag on Vietnam’s economy in the past two years, as noted several times in our publications. While the entire real estate market has experienced cyclical slowdowns across the board, it is the residential market, particularly high-rise apartments that the underlying question usually refers to.

Attempting to answer this question for the entire high-rise apartment market can be a brave act, not only because of the complexities that come with its different market segments behaving differently, but also because of the possible market reaction that any affirmative answer may bring. Nonetheless, let me offer my humble view: While the overall market may not be nearing the bottom, certain segments may be within two or three quarters away from bottoming out.

A look at our 1Q13 data yields several key findings:

First, HCMC will likely see prices bottoming out sooner than Hanoi. While prices in HCMC continued their prevailing downtrend but have seen declines slowing in most cases, Hanoi residential prices have only started experiencing significant declines recently. In almost all segments of the Hanoi market, quarterly declines in 1Q13 were still faster than the average quarterly decline seen in the past one year, indicating significant downside trajectory remains in place. Although cash rich buyers – a trademark of the Hanoi market – may occasionally stir the market in the short-term, we do not think it will lead to a sustainable recovery in Hanoi yet.

Second, affordable housing in HCMC may see prices bottoming out in 2013. Except for some projects where downside trajectory remains large, many projects in the Affordable segment and the low-tier Mid-end segment either have limited unsold inventory or are nearing completion. Prices in this segment have dropped to levels that are only marginally higher than construction costs. Assuming a sustainable price-to-income affordability ratio of 30, the intrinsic value of an affordable apartment in Vietnam would also be around current price levels. Considering these, we think affordable housing developers will likely have limited room, of about 2-4% in total, to lower prices for the next two to three quarters before a recovery takes place.

Third, High-end apartments will likely see a continued underlying downtrend, although most of the downside trajectory is in the secondary market. This is because many major high-tier Mid-end projects will continue launching new phases of sales and compete fiercely with High-end apartments, especially those in the secondary market. While we do not see credible signs of primary prices of High-end apartments bottoming, certain projects may outperform the market significantly enough to provide buffer to primary price levels. In fact, if High-end apartment prices in the primary market continued to perform as have been seen recently, those prices may bottom sooner than expected.

About the author
Trung Thai, CFA is Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Affordability, Residential Research, Vietnam | No Comments »

Reflections From The Windows Of The MRT In Metro Manila

Thursday, April 4th, 2013

It has been ten years since I came to Metro Manila to study and then to work. As someone from the provinces in the Philippines, commuting in Metro Manila can be quite a challenge at first, but the presence of the Metro Rail Transit (MRT) has made commuting relatively easier. The MRT runs along Epifanio de los Santos Avenue (EDSA), one of the major roads in Metro Manila and a road etched in recent Philippine history as the site of the first People Power revolution. Providing convenience to many commuters and helping to reduce the traffic volume along EDSA, the MRT has become an integral part of many people’s lives in the city since it began its operations more than a decade ago.

Property developers recognise the importance of this infrastructure. Since residential condominiums started gaining popularity several years ago, developers have been constructing residential condominiums connected to or near MRT stations. As I ride the MRT to work each weekday and look out from its windows, I have watched the growth of the developments with a mix of excitement and concern.

As at April 2013, there are several existing condominiums, numbering around 5,500 units connected to MRT stations or located along the EDSA. During the next five years, more than 27,000 residential units that are connected to or are just several metres away from stations are expected to complete. Developers use the proximity of their projects to the MRT to attract buyers. After all, the MRT is connected to several established and emerging business districts in Metro Manila, such as Makati CBD, Ortigas CBD, Robinsons Cyberpark, Araneta Center, Eton Centris and the upcoming Vertis North.

At present, the trains are overcrowded during peak hours. In addition, some trains experience technical problems from time to time. Over the past decade, many plans to significantly improve the MRT and its services, which are usually associated to a possible fare hike, have surfaced. However, many of the plans have yet to be actualised. The MRT has contributed to the rise of property developments along its route. The average daily ridership of the MRT in 2012 was around 500,000 people and this number is expected to rise over the next five years as more residential condominium developments are completed. If the MRT remains in its current condition, property growth along the MRT could be affected in the future.

The real estate market in the country has witnessed unprecedented growth in the past few years. One of the key factors to sustain that growth in the long term is the improvement of infrastructure, such as the MRT. Hence, it is important that stakeholders prioritise the development and advancement of vital infrastructure, not just the MRT but other infrastructure as well, to support a more sustainable growth in the property market and the economy in the long run.

About the author
Jessica Mae Go is an Assistant Manager for Jones Lang LaSalle in the Philippines, based in Manila.

Posted in Infrastructure, Philippines, Residential Research | No Comments »

China’s Brave New World

Wednesday, April 3rd, 2013

March was an eventful month for China’s property sector. It started with a policy announcement before the start of the National People’s Congress and was followed very closely by two very one-sided stories on the American television program 60 Minutes.

The policy announcement was something of a surprise in terms of its timing and content and raised a huge amount of interest among the local and international media. While basically aligned with the existing policy regime, it focused on several loopholes in how these policies have been implemented which have allowed for investors to get more active in the market in the several prior months. The immediate response in the market was for existing owners of investment properties who were thinking about selling, to try to front-run a change in how the capital gains tax was to be implemented.

However, by the end of the month, announcements by local governments about how they plan to implement these ‘5 new measures’ were pretty underwhelming. Other than the city of Beijing, most have simply reiterated their existing policies and few have made any mention of the capital gains tax. For now it seems like it’s back to business in the residential sector. But I would expect China’s new leaders to crack the whip, so to speak, if the government’s monthly price index shows continued increases in the majority of cities. The ‘5 new measures’ if fully implemented, could have a dramatic impact on the market, but only time will tell if policymakers have a stomach for the degree to which that could slow the broader economy.

The 60 Minutes story on the other hand raised a lot of interest from friends and family back home who were suddenly worried about what a ‘bubble’ in China could mean for them. As a long time viewer of 60 Minutes, a show that I have often called the best program on television, I was disappointed by their near complete lack of balance in presenting the story. Their ‘expert’ analyst was someone who has long made his name (and livelihood) from the ‘China Bear’ story and they fell for the easiest trap when it comes to reporting on China – is this particular anecdote indicative of a larger problem – basically is what we are seeing here happening all over China. Their ‘expert’, of course, said ‘yes, we do see these empty malls and ‘ghost cities’ all over China’.

We beg to differ.

China is a big place. It is possible to find anecdotal evidence of virtually any point you want to make. Every quarter I send over 40 research analysts into the field to track the office, retail and residential property markets in 20 large cities in China. We have arguably the most comprehensive database of commercial properties in the country. Are there bad malls in China? Sure. Have ghost cities been built? Undoubtedly. Do they represent the majority of construction activity? Or even a meaningful minority? No chance.

China’s golden age of investment led growth will come to an end, and probably sooner than most people think, but the country’s leaders are pragmatists, not ideologues. They do not have their heads buried in the sand the way I fear the leader of most Western democracies do. The top priority of the new generation of leaders is to transition the economy toward consumption led growth. They will introduce market mechanisms for interest rates and the allocation of resources in the economy; they will promote private enterprise; and they will reform the sclerotic state owned enterprises that predominate the economy. These reforms will be painful; they will necessarily mean China’s economy will grow more slowly than we’ve seen in the past; and there is no guarantee that China’s leaders will get it right. But the rest of the world has a lot riding on the outcome, whether we like it or not. So we should pay attention and try to get the facts right, to the extent that is possible.

About the author
Michael Klibaner is the Head of Research for Jones Lang LaSalle in Greater China, based in Hong Kong.

Posted in China, Economic Research, Residential Research, Uncategorized | No Comments »

Eighth policy– possibility or just hearsay?

Thursday, March 14th, 2013

The number 7351 is how one could express the Singapore government’s policies towards the residential property market. Seven is for the number of property market cooling measures introduced by the government, three years the time period in which they were issued, and 5.1 months the average length of time between the issuance of each policy.

Clearly the state has changed from taking a heavy-handed position as in 1996 to a much softer, “feel the market” approach – reflecting the more consultative governance of today. The results of these two policy approaches are remarkably different. Looking at the island-wide Property Price Index (PPI), the residential market corrected at an average of 2.5% per quarter between 2Q96 and 2Q98 (when the state relaxed its grip). In the current situation, the market has continued to expand at an average of 1.8% per quarter since the first cooling measure was introduced in Feb 2010.

If one subscribes to the view that an effective policy is one that would lead to a correction in the market, then clearly this soft policy stance the state has adopted is ineffective. However I believe the policy intention is not about causing a correction but rather a retardation of the growth. If this is truly the case, then the policy so far has been very successful. The question that begs answering is what is an acceptable level of growth?

In the present economic condition of slow global growth with low interest rates, a property annual growth rate just above the average national inflation rate of 4.0% (over the last five years), is what the state should be comfortable with. In other words, any quarterly growth rate exceeding 1-1.25% could trigger a new policy intervention. For example, the PPI in 4Q12 expanded by 1.8% q-o-q, a rebound from the 0.6% q-o-q in 3Q12. Consequently the state intervened with the 7th round of tightening on January 11. Similarly in 3Q11, the quarterly increase remained at over 1%, and this resulted in the state introducing the 4th cooling measure on December 7, 2011.

Current market murmur is that an 8th policy is inevitable. The social media space was rife with speculative talk of more cooling measures to be introduced last Friday. Sure enough, there was an announcement but more towards enhancing the public housing program rather than targeting the private housing market. I believe that until we see another quarterly increase in PPI exceeding 1%, we are unlikely to face further intervention. If we do, then the state might introduce a cap on the ratio of total debt to household income; tighten the existing policies; and/or introduce a mortgage service ratio into the private housing loan market. Until this happens, the market will continue to show resilience.

About the author
Yang Liang Chua is Head of Research for Singapore and South East Asia at Jones Lang LaSalle.

Posted in Residential Research, Singapore | No Comments »

Developers Switch Back To China’s Top Tier Cities

Wednesday, February 20th, 2013

China’s stock market started 2012 pessimistically but ended on a strong note. So it was with the residential market as well, where transaction volumes rose by 39.3% from a year ago for the 20 cities we monitor, as detailed in the chart below. As we expected, industry consolidation accelerated throughout the year as the top developers continued to outperform their peers. According to the data from China Real Estate Information Corporation, sales revenues of the top 10 developers in China increased 30.6% y-o-y to RMB 822.2 billion in 2012, with their combined market share growing approximately 2 percentage points to 12.8% in 2012.


Source: CREIS

The top developers’ rising sales revenue allowed them to step up their budgets for land acquisitions in the second half of 2012. For instance, Vanke, China’s largest developer by market value, spent about RMB 70 billion on land acquisitions in the second half of 2012. Similarly, Poly spent nearly RMB 30 billion on land acquisitions in 4Q12 alone. According to the data from CREIS, the total expenditure on land acquisitions by the top 10 developers reached RMB 175.3 billion in 2H12, up 50% from 1H12. In addition to the renewed interest by developers for land acquisitions, there also was a noticeable change in developers’ strategies in 2012. After several years’ aggressive expansion into lower-tier cities, the top developers are now switching back to top Tier I and II cities, such as Shanghai, Beijing, Hangzhou, Chengdu, Chongqing and Wuhan. A key reason for this change lies in the fact that the market fundamentals in the higher-tier cities look much healthier in the short to medium term than in the lower-tier cities.

Despite the high land costs, the supply pipeline in top Tier I and II cities is much more manageable than in lower-tier cities. A significant portion of Tier I and II cities’ populations are composed of college graduates from other cities and provinces seeking a place in the growing white-collar workforce in which salaries are higher and opportunities greater than back home. Jobs in many smaller cities offer less potential for career growth, and are considered to be less meritocratic. Shanghai, a top Tier 1 city, is viewed as the land of opportunity where the private sector is very large and the playing field is more flat. Immigrants thus provide a steady pool of potential buyers to the residential market in top Tier I and II cities. In contrast, lower tier cities often face very large supply pipelines relative to their pools of potential buyers. In the short to medium term, lower-tier cities’ large pipelines are likely to result in further price corrections, while in the top Tier I and II cities, developers can gain competitive advantage by developing high quality projects instead of only lowering prices. That said, the lower tier cities do offer several promising prospects in the long run, such as fast-rising urbanisation rates and low land costs.

About the author
Joe Zhou is the Head of Research for Jones Lang LaSalle in Shanghai.

Posted in China, Land Supply, Residential Research | No Comments »

The Indian Residential Price Conundrum

Friday, February 15th, 2013

The Reserve Bank of India (India’s central bank) recently reduced the repo rate (rate at which RBI lends to the various banks) by a quarter-percentage point, to 7.75%. This was the first reduction seen in nine months as the Indian economy grappled with high consumer inflation (recently moderated from over 10% in the last few months). As key policy rates remained unchanged, the economy struggled with a tepid investment environment. The RBI however remained steadfast and did not give in to the government pressure to bolster the flagging GDP growth by reducing key rates as controlling inflation remained the prime concern.

During pre-GFC days, the real estate sector had been one of the major beneficiaries of the affordable borrowing rates, with development firms enjoying project loans while benefitting from the demand for residential housing remaining robust due to affordable home loan rates. A revision in lending rates to infuse liquidity in to the market had been a major demand emanating from the real estate sector as increasing supply and a range-bound absorption rate had increased the overall inventory levels in the residential market. The impact of the lowered rates was immediately apparent as most banks announced reduction of 25-50 bps in home loans.

It is evident that the expected price-correction will not materialise any time soon with the developers getting some breathing space. Cheaper home loans have given developers the opportunity to maintain price levels while less expensive advances will positively impact their current cash positions. Buyers will also be encouraged to enter the residential market as their home-loan EMIs (Equated Monthly Installments) will reduce. This will also help the developers offload their housing units’ inventory.

Developers cannot be faulted entirely for their prices as increasing construction costs and rising land valuations have added incremental factors to project costs. Thus, price reductions have not been made easy in this scenario. It also did not make business sense for them to sell at cost and hence the predictions of price correction have not materialised, though the developers have had to invent innovative selling schemes to boost sales volumes.

A macro-level approach is needed to control rising residential prices. While the Tier II and III cities remain attractive in terms of prices, the larger cities need more proactive government action to benefit buyers. Actual benefits to buyers will not accrue by merely lowering home loan interest rates but by providing inflation protection for the whole sector. A more robust land policy and unlocking land holdings will definitely reduce the land value component cost in a residential project. Higher financial allocations and access to cheaper monies will also allow for improving the operating margins.

In the absence of policy reforms, the long term solution to the problem of meeting India’s housing demand at affordable price-levels is not in sight. An impetus from cheap home loans is unlikely to convert to demand every time, and while it is important in context with situational necessity, we should not make it a pre-requisite for the residential sector to perform well while ignoring structural reforms.

About the author
Rohan Sharma is the Senior Manager for Jones Lang LaSalle in India, based in Gurgaon.

Posted in India, Residential Research | No Comments »

Impact Of Upcoming Legislation On the Hong Kong Primary Sales Market

Thursday, January 24th, 2013

In an effort to improve market transparency, a new legislation will be introduced to govern residential sales in the primary market. From April 2013 onwards, developers will be required to launch a minimum of 50 units or 20% of the total number of units in a development or a phase of a development with 100 or more units, whichever is higher, and at least 10% of the total number of units in each subsequent batch launched thereafter.

This differs slightly from the current regulation, which requires a minimum of 50 units or 50% of the total number of units as part of the first batch of units launched and the absence of restrictions on the number of units on subsequent launches. While launching a minimum number of units in the first batch, developers have taken the current regulation to their logical extreme – launching ‘batches’ with a single unit in subsequent batches to gauge market response and aggressively set prices. However, by forcing developers to launch a greater number of units onto the market, there will be fewer chances for them to test the market compared to before.

The new rule will force developers to make a trade-off between maximising sales proceeds and volumes with trying to achieve a high sales rate. Though developers are able to suspend sales if buying demand is weak and issue a revised price list, they are unlikely to do so as it could undermine the confidence of buyers. I think developers are likely to take a more conservative pricing strategy at the outset to favour sales momentum, especially in an environment where government policy has been getting more and more restrictive.

I think home prices are unlikely to see pressure as a result of these measures and will still largely be priced on par with those in the secondary market as the key market fundamentals remain intact. Therefore, I reckon that while the new regulations may help improve market transparency, they are unlikely to have any meaningful impact on pricing, which I expect to continue to grow moderately over the near term.

About the author
Vienne Chan is the Manager of Research for Jones Lang LaSalle in Hong Kong.

Posted in Hong Kong, Residential Research | No Comments »

Singapore Residential Market – Moderation Expected After Latest Government Measures

Friday, January 18th, 2013

When the Urban Redevelopment Authority (URA) announced the flash estimate of its residential property price index for the final quarter of 2012, it surprised many as the 1.8% increase reflected a pick-up in prices following minimal growth of 0.6% and 0.4% in the third and second quarters respectively. That this occurred shortly after loan tightening measures were imposed in early October 2012, causing developer sales to drop 44% in November from the previous month, made it even more perplexing.

The residential market was left with a sense of discomfort that the Government could again intervene with another set of cooling measures. True to form, the latest measures were announced on 11 January 2013 jolting the market by their severity. The additional buyer’s stamp duty (ABSD) which was imposed in December 2011 was raised significantly. After the revision, foreigners and corporate entities will have to pay 15% ABSD for the purchase of any residential property, for permanent residents the ABSD rate will be 5% for their first purchase and 10% for second and subsequent purchases while citizens are levied 7% ABSD for their second purchase and 10% for third and subsequent purchases.

Housing loans were also tightened further. The loan-to-value (LTV) limit for buyers obtaining a second housing loan was reduced to 50%. If the loan tenure exceeds 30 years or extends past the borrower’s retirement age of 65, the LTV is only 30%. For third and subsequent housing loans, the LTV was cut to 40% and will be further reduced to 20% if the borrowing period is more than 30 years or it is goes past the borrower’s retirement age of 65. Borrowing for corporate entities was also severely cut to a LTV limit of 20%. Besides lowering LTV limits, the minimum cash down payment for buyers with one or more outstanding loans has been raised to 25%.

From our analysis, the ABSD and loan tightening for private residential properties is targeted more at investors and foreigners. Buyers with no outstanding loans escape unscathed as it is still possible for them to borrow up to LTV of 80% with only 5% cash down payment. The robust measures can be expected to substantially discourage demand from investors and foreigners leaving mainly first-time buyers or those without outstanding loans in the market. As a significant proportion of buyers are investors, we expect demand for private homes to moderate significantly. In the near term prices are likely to stagnate and beyond that it depends on the impact of the economic slowdown.

Measures specific to public housing and executive condominiums (EC) were also imposed simultaneously. For public housing, the measures were targeted at moderating its buoyant resale market and rising prices. The EC measures include capping EC strata floor area at 160 sqm to ensure more affordable size units are built following a recent controversy of “EC penthouses” being sold as well as addressing other irregularities in EC development.

About the author
Ong Teck Hui is National Director for Jones Lang LaSalle, based in Singapore.

Posted in Residential Research, Singapore | No Comments »

Averting The Property Bubble In The Philippines

Thursday, November 22nd, 2012

I am often asked if there is a property bubble developing in the Philippine property sector, specifically in the residential condominium segment. The anxiety brought on by this question is allayed by the recent activity that has been seen in other mature markets, such as Singapore and Hong Kong, where the government has played an active role in curbing the excessive escalation of property prices.

In the Philippines, the Bangko Sentral ng Pilipinas recently ordered banks to provide additional details about their real-estate exposure, requiring them to provide details on: (1) the investments in debt and equity securities that fund property ventures and the loans given to property developers; and (2) the ancillary services relating to the construction and development of real estate projects such as the buying, selling, renting and managing of these real estate properties.

Some market players saw this move as a pre-emptive measure to curb any property bubble that might be developing as a result of the unprecedented amount of building seen in the country, especially in the high-rise condominium market. There are currently around 130,000 luxury-to-mid-end residential condominium units in Metro Manila, and over 1.2 times or some 150,000 units are expected to complete within the next five years.

In terms of asset performance, the bigger picture indicates a fairly moderate growth. The compound average annual growth rate of resale capital values between 2009 and 2012 has been 11%, in a sample of the existing luxury and high mid-end condominium developments in the Makati CBD and Bonifacio Global City. Additionally, the average sale prices of new developments have exhibited a similar trend during the same period.

The hard lessons learned during the 1997 Asian Financial Crisis have prompted local regulators and developers to promulgate measures to prevent a property bubble from developing. Further, the regulators are motivated to prevent further disruptions in the market (which are likely to be brought by a property bubble) as the economy is set to receive upgraded credit and investment ratings from reputable rating agencies.

The challenge today is for both the regulators and the key market players to work together in analysing the sector by ensuring that the market information they provide is transparent and reliable. Hence, we believe that a more in-depth study of the various factors affecting the growth in the high end residential segment should be conducted to accurately determine the situation and aid the regulators in prescribing a more targeted preventive measure to avert any property bubble from developing.

About the author
Claro Cordero Jr. is the Head of Research, Consulting & Valuation Advisory for Jones Lang LaSalle in the Philippines.

Posted in Economy and Real Estate Markets, Philippines, Real Estate Research, Residential Research | No Comments »

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