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Saturday, December 17, 2011

Measures push down China property prices

AS China's property market experiences a slowdown in recent months, developers in the country are digging deep to walk out of the tough times unscathed.

The average price of residential properties across 100 Chinese cities surveyed fell to 8,832 yuan (RM4,416) per sq m in November, which was a 0.28% decline from October, according to a report released by the China Real Estate Index System.

House prices declined for the third straight month after the government moved to cool the overly-hot market with a wave of tightening measures early this year.

Yu: ‘We believe that property will still be in the government’s social development agenda. So, it’s a question of when it will start rela xing its policies again.’

In 10 first-tier cities such as Beijing, Shanghai and Tianjin, house prices decreased 0.36% month-on-month to 15,663 yuan (RM7,831) per sq m while Nanjing and Chengdu saw a sharp decline of up to 1.2%.

The drastic measures include restricting locals and foreigners from owning more than one or two homes, imposing annual property tax in some cities and requiring buyers to pay a minimum downpayment of 30% of the value for the first property and 60% for a second unit.

For second hand property, the downpayment ranges from 40% to 60% depending on the age of the property.

Other policies such as ensuring banks impose mortgage rates 1.1 times the benchmark lending rate and imposing a full business tax payment for a property that is resold in less than five years, have all contributed to a slowdown in property sales and prices.

Except for a recent move by the People's Bank of China to cut reserve requirements for banks by 50 basis points starting Dec 5, the government has shown no further sign of loosening the regulations as it is steadfast in bringing market prices to reasonable levels.

The situation leaves cash-strapped developers with no choice but to offer 20% discount for their units amid uncertainties in the real estate market.

During a recent interview with StarBizWeek, Shanghai Firstreach Real Estate Co Ltd, a wholly-owned Malaysian property developer, related how it responds to the slowdown in the market.

Its chief operating officer Yu Tat Loong says despite the strict control measures, China's property market still has good prospects.

Setting trends: The Imago Mall along with Imago Tower has become an iconic development for Shanghai Firstreach Real Estate, a wholly-owned Malaysian property developer in China.

“We will still expand our operations here because long-term wise there is room for development even in first-tier cities and especially so in second and third-tier cities,” Yu shares of the company's plans.

Incorporated in Shanghai in 1997 with a start-up capital of 330 million yuan (RM165mil), the company bought a piece of land in Putuo district, within Shanghai's inner ring road, for the development of the Palm Garden condominium project.

The first phase with more than 350 bare-shell units was completed in 2003. Two years later, the construction of the second phase with another 600 units began. The entire project was completed in 2008 with a total gross development value (GDV) of approximately 2.5 billion yuan (RM1.25bil).

The company also completed a 110,000 sq m commercial development called Imago, on the land adjacent to Palm Garden, which hosts an office tower, a shopping mall and serviced residences with a GDV of four billion yuan (RM2bil). Oakwood Residence Shanghai opened in April 2010, followed by a six-storey Imago Mall in June 2010 and a 24-storey Imago Tower in January this year, all managed in-house.

Yu says the office spaces at Imago Tower and the serviced apartment units are not for sale.

“Many developers are facing funding problems this year and are forced to sell their residential units at a lower price to ease their cashflow. We sold off a significant number of units at Palm Garden early and have an asset in Imago, which can generate recurring revenue to sustain our operations,” he says.

Optimistic outlook

He says the company, even with an apartment block at Palm Garden not yet sold, amid the downward trend in residential prices in the city, decided to hold onto the properties at Imago as it was convinced that the market would rebound after a correction.

“If the remaining units were sold at a lower price, there would be cash going back to the system. But, we are no longer dependent on the sale of apartments to keep us running, so we decided to keep them,” he adds.

In 2003, the units at Palm Garden were sold for an average of 7,000 yuan (RM3,500) per sq m. The units of the second phase were then sold in 2007 at 18,000 yuan (RM9,000) and reached 35,000 yuan (RM17,500) by 2009. Over the past eight years, the prices have increased five to six-fold.

During the first quarter (Q1) of 2011, Palm Garden saw prices average at 38,000 yuan (RM19,000) per sq m before going up to 39,000 yuan (RM19,500) in the second quarter (Q2). The price reached 40,000 yuan (RM20,000) by the fourth quarter (Q4).

Yu hopes the government will relax its regulatory policies on the housing market so that developers like Shanghai Firstreach will be able to chart their expansion plans, especially on residential projects.

“There is definitely a demand but it is just that house buyers are adopting a wait-and-see attitude hoping developers will further lower their prices. If these policies are still in place, going into residential projects will be more risky with escalating land cost and sluggish sales,” Yu says.

“We believe that, be it affordable housing or more luxurious apartments, property will still be in the government's social development agenda. So, it's a question of when it will start relaxing its policies again.”

Yu says Shanghai Firstreach has made the right choice by venturing into commercial and retail property sector earlier as this has cushioned the impact that stringent housing policies have brought about.

“The prospect of commercial projects is positive. Shanghai has seen rental rates at office towers escalating. Despite the fact there are already so many properties up, there is still a demand for quality office space and that's why we have made two upward adjustments to our rental rate in the second half of the year,” he says.

Imago Tower, with an international tenant portfolio of Malaysians, Singaporeans, Japanese, South Koreans, French and Germans, saw gross rental averaging at 4.50 yuan (RM2.25) per sq m a day in Q1 before revising to five yuan (RM2.50) in Q3 and six yuan (RM3) by Q4.

The 11-month-old Imago Tower has an occupancy rate of 60% while Imago Mall is almost 97% occupied by retailers, restaurants and a supermarket.

Yu says the retail market was booming from an increasing domestic demand with many foreign brands such as Uniqlo, Charles & Keith, Morgan, Oasis and Zara expanding fast. Zara has opened its largest store in the East China region at Imago Mall.

“Old tenants may have moved out but new ones come in paying higher rental. Gross rental on the ground floor of Imago Mall has reached 35 yuan (RM18) per sq m a day. You can see that retailers are confident with the market and with us,” he says.

Besides Palm Garden and Imago, the developer admits that it still does not have enough iconic developments for it to have a firm foothold in Shanghai.

The company is set to increase its land bank in the city and surrounding cities.

“We are acquiring another piece of land in Shanghai for a residential and commercial-cum-mall development. We are also in the midst of negotiations to build and operate a retail mall in the heart of Suzhou,” he says.

“At the same time, we are bringing our experience back to Malaysia and providing retail consultancy and management for a 160,000 sq m mall there,” says Yu.

With a lesser-known track record than its Singaporean counterparts, who outnumber Malaysian developers in China, Shanghai Firstreach had some problems to market its properties initially.

“Many retailers and house buyers are not familiar with Malaysia. But we tell them we are a Malaysian company and with the experience we have over the past two decades, we are bringing an international-type management to China's property market,” he says.

By The Star

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