Chinese Real Estate Market Enters Uncharted Territory

Gao Shanwen, chief economist of Essence Securities discusses China's housing market. Earlier I posted the take by Guan Zhixiong of Nomura: China's Housing Bubble Bigger Than Japan's

中国房地产市场驶入深水区 正在去泡沫化
Recently, the China Financial forty people Forum (CF40) and Nomura Research Institute Financial Markets Research Council jointly organized a seminar in June 2014 annual internal financial roundtable conference on the theme "Sino-Japanese economic: the risks and opportunities over the next decade," the China and Japan more than 30 economic, financial sector experts participated in a speech communication.

Seminar half, the focus on the guests in Japanese macroeconomic situation over the next decade, more economic issues such as China and Japan launched an in-depth discussion; seminars in the second half, CF40 member, Essence Securities chief economist Gao Shanwen, Nomura Institute of Capital Markets chief researcher Kwan, director of the Bank of Japan Nobuyuki Kinoshita, respectively, on "China's real estate market is going bubble", "China's real estate is unlikely to repeat the mistakes of Japan", "structural reform of Japan's financial system" made keynote speeches, the guests after the date the focus on China and Japan, the real estate market bubble, risk and deal with issues carried out in-depth discussions. The meeting was chaired by Chinese Financial Forum Secretary General Wang Haiming forty people, Shanghai Institute of new financial co. The audit by the author and the organizers permission, "21st Century Economic Report" dated the current portion of the second half of presentations and discussions, and to readers.

China's real estate industry is facing funding pressures

Micro-level data from the starting to the class of real estate listed companies held as inventory levels molecule, its operating income in the period of time for the denominator, you can get inventory turnover countdown. Operating income data can be used inside the income statement, cash flow statement can also be used inside, little difference between the two.

Comparative Figures 1 and 2, 2008 years later, the real estate company to observe the sample relative to a given revenue, there has been a significant increase in the amount of inventory they hold, until approximately doubled compared to 2006 The total assets ratio rose from about 2.5 to 4, an increase of 60% -70%. Undoubtedly, a significant increase in inventories which account for a large proportion. This rising process, and China in a substantial increase in 2008-2011 years experience in home prices, the real estate market bubble, as well as four trillion stimulus is very strong tightly linked.

Since the beginning of 2012, the proportion of total operating revenue increased inventory trend has basically ended, and even a slight decrease in the beginning of the horizontal development. Judging from the situation of total assets, total assets, given the need to hold the revenue from the first half of 2012 after more obvious decline. This transition, accompanied by cross-examination of other data, it is very meaningful, and it is very important. For the status of our understanding of the real estate market, predict future trends, are very important reference.

We can also supplement the discussion from another angle. We calculated the listed real estate companies in ROA (Return on Total Assets) and ROE (return on equity). The focus is, from the beginning of 2006 or 2007, ROA and ROE on a very significant departure from the trend, the gap significantly expanded. This reflects the real estate companies leverage ratio significantly improved, but so far may still upgrading. In terms of the process of adding leverage for the sector in 2010 is divided into two sections before, in front of the stage is the same ROA and ROE to rise, because the return on assets rose, so companies increase leverage. In a later stage, ROE rose, while ROA declined, companies are forced to use some reason the level of leverage to push up prices and support ROE, but began to decline in the late total assets.

Also, because the real estate business and the level of total assets inventory levels it supports on the rise, it is also necessary to end the debt rises, this rise is the main source of debt financing rather than equity. Combined with some knowledge from the macroeconomic and financial system, the rising process has three main sources of debt financing. First, a bank statement and later more and more strict control of lending. Second, in 2011 after the shadow banking system is rapidly becoming a very important source of financing for financing. In the shadow banking system financing among perhaps 40% of the direct flow of the real estate market, and perhaps some indirect flow of the real estate market. The shadow banking system has also been a certain degree of actual control.
The third most important source of financing is private financing or usury activities.

These three sources of financing have two common characteristics: short-term (mostly not exceeding two years), high interest rates. Interest rates associated with the developer qualifications. In the field of trust financing and private financing, for an ordinary qualified developers in terms of interest rates may be between 15% -30%. After the debt maturity corresponding to the developers if the assets can not be quickly realized, will also face increasing pressure on cash flow.

Pressure on cash flow will intensify under two conditions. The first condition is the monetary tightening, the whole society becomes extremely difficult to raise funds, in which the shadow banking system and civil usury will expose a very large risk of default. Media boss jumping, foot EAD event is reflected, more proof behind this tension and adjust the real estate market in private lending activities. The second condition is a significant decline in real estate sales, making the real estate business cash flow sources rapidly depleted or declining. In this case, even if the developers can quickly cuts started to take place, the cash flow during the transition phase is still facing great pressure. Tension, steel trade finance and commodity finance for bad experiences, such as the first half of this year, private lending system, are actual cases of this situation. Glass, commodity trading, steel and other industrial bosses obtain trade financing (steel trade is repeated financing), these funds may eventually flows to the real estate, so the next real estate capital chain tension, the civil usury businessmen will feel unprecedented pressure . This is our property developers balance and cash flow levels under pressure a brief summary.

Real estate market is going bubble, to inventory

At the macro level and micro level seen in the fact that to some extent can confirm each other.

Figure 3 is a Chinese Bureau of Statistics released the 70 cities (divided into a second and third tier cities) new housing prices than in the case of the ring, Figure 4 is Index Research Institute released one hundred cities (divided into a third tier) residential ( including second-hand housing) prices, after exclusion of data processing by fixed base fluctuations reflected the same trend, but also very consistent with the change in the listed company's balance sheet, so the foregoing analysis of trends in the real estate development is credible.

From the start, and in terms of volume, the subject line and the following cities in three. Let's focus on malls and observe the following data in third-tier cities (see Figure 4), if in January 2011 to 100 in May 2014 less than 107. In other words, in about four years, set the base price of less than 7 percent cumulative increase. And four years, CPI rose about 15% of disposable income rose a conservative estimate of 30%. So, relative to income in the last three and a half years, prices adjust and repair process has actually begun.

If we entirely new residential basis, then the conclusion is similar, although there are some differences in the data. May 2014, the new housing price fixed base close to 109, up speed is less than 3% per year, this is probably not enough to cover up speed under conditions of high leverage and high cost of financing, the developer of the cumulative increase in finance costs. Interest cost of inventories in order to support developers need to pay every year more than 2% -3%. Therefore, the observation of the new housing data also support this view: after 2011, as the main body of China's real estate market, the three lines and the following cities to foam process sometime in 2011 has already begun. People for attention and discussion focused on the real estate bubble of the first-tier cities in China, namely Beijing (real estate), Shanghai, Guangzhou (real estate), Shenzhen (real estate). Fixed base price indices tier cities, both in the Bureau of Statistics released data in the data or the malls, have reached 120 or more. So, since 2011, China's real estate market has experienced significant differentiation in a very small part of the region, the entire house prices continued rapid bubble, and the bubble in the process to inventory and to the main part of the real estate market trading volume has begun.

From 2008 to 2010, China's small cities housing prices increased significantly in all areas. In conjunction with this, we can explain the amount of inventory of listed companies began to stabilize after 2011, the total number of assets also declined fact. The reason is that the market has started to adjust, but until now has been adjusted at least two years and a half. With the continued market adjustment, real estate companies will realize sooner or later the market downturn, which forced to inventories, reduce the number of assets. So, we see statements of listed companies and asset inventory number is the number of high points in early 2012, after the real estate business in general has begun to adjust.

In addition, some of the data observations to the National Bureau of Statistics announced commercial housing sales area as a basis for analysis. Although a variety of reasons, some of this data may exist in the short term bias, but in a relatively long sequence of view, it is quite reliable. The average growth rate of real estate sales prior to 2007 about 21% to 22%, about 13% in 2007 to 2010, in 2011 after an average of 8%. This is the smoothing of the market in some cases dramatic short-term fluctuations in the observed.

Another indicator is the new housing construction area. New construction area is the future of the corresponding (average a year and a half later) the supply of housing. Prior to 2007, the average growth rate of real estate new construction area is about 19%, consistent with the growth rate of sales area; in 2007 -2010, the average growth rate of sales area is only 12%, while the average increase in real estate new construction area speed is approximately 22%, which reflects the time in a few years after the financial crisis, the real estate market has experienced a significant inventory accumulation process, which is also well reflected in the data in a listed company. Equally important is that since 2011, the growth rate of the real estate market, the average sales area is 8%, but the average growth rate of new construction area of ​​less than 5%. Growth in supply from the growth point of view has been significantly lower than sales growth. In other words, since 2011, the real estate market has begun to inventory.

Based on the above data, we can make the basic assessment of the status of the real estate market. Standing in June 2014 to observe this point China's real estate market, we have certainty that the main Chinese real estate market in the past three years has been to inventory and to foam process; in first-tier cities, the real estate market Overall continue to experience significant foaming process, which may have some macroeconomic risks, but not particularly great. We should focus on issues not want to go to bubble, but how should I do next.

China's real estate market is entering deep water

China's real estate market is still three to five years to complete the process to inventory and foam. Listed companies based on inventory data, and the data projections, we can see that although the market has continued to bubble process more than three years, but perhaps not the extent to bubble and third. Compared with the situation since 2012, the next few years to bubble to the inventory will be significantly accelerated.

In this process to bubble in real estate and in some areas the following three lines of the city, in some areas as well as private credit in some sectors of the shadow banking system, there will be a serious breach of contract and breach of contract arising large-scale restructuring. Within a certain range, the fierce market adjustment is inevitable. In the most developed Yangtze River Delta region of China (without regard to Shanghai), more intense adjustment has been going on for two years. It is in this context, where the banking system pressure rise, private lending system pressure is quite big. Even the shadow banking system, pressure is also very significant. Steel trade finance massive bad debts, etc., but also occur in this context.

Therefore, the Chinese real estate market is entering deep water boat (uncharted area), we have never experienced before. Here maybe reef, there may be a lot of storms, will not capsize it? My personal view is that the Chinese government still has sufficient financial resources and capacity, to a certain extent, control the development of the situation, not out of control.

(The author is a member of China Financial Forum forty people high Shanwen, chief economist at Essence Securities article is the author of the recently held 2014 annual keynote day roundtable on internal financial seminar by China Financial Forum Secretariat forty people finishing, audited by the author. This meeting was jointly organized by China Financial Forum forty people Nomura Research Institute Research Committee and the financial markets.

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