Realty in smaller Chinese cities plays catch-up

Beijing: The spectre of ‘empty’ commercial complexes across Chinese cities and a precariously poised multi-layered property market have once again come to haunt the economy.

According to planning officials, commercial complexes are in oversupply and particularly across the central and western regions. Nearly every mid-sized or even a small city has built, or plans to build, commercial complexes.

No doubt the oversupply is driven by the boom in retail sales. According to a survey by a global agency, in the third quarter, retail sales for fast-moving consumer goods in smaller Chinese cities accounted for 44 per cent of the nation’s total, generating the mirage that commercial shop space is a requirement.

However, another set of data indicates consumers from the same cities generated 52 per cent of China’s total online shopping. Total online retail sales reached over 454 billion yuan in the third quarter, up 42.4 per cent from the same period last year. As is obvious, growth in volume at physical stores have slowed down.

What does this mean for the property market as a whole? The housing sector in smaller cities are increasingly troubled by oversupply. Property analysts tend to divide Chinese cities into four tiers, each with its contradictory market forces. The four first-tier cities are Beijing, Shanghai, Shenzhen and Guangzhou; the second tier comprises provincial capitals and larger cities in each region; most cities in the sparsely populated west are put in the third and fourth tiers.

In its eagerness to compete and generate money, many smaller cities, lacking in clear development strategies, pushed forward real estate development. As a result, the top five cities whose property markets face the most risk are in under-developed Gansu and Inner Mongolia, along with Lhasa, the capital of Tibet. A ranking carried out by a Chinese real estate group among 288 cities, about 200 small and third-tier centres faced an oversupply.

This indicates a worrying lack of demand in brick-and-mortar structures and the tendency of local governments to rely on revenue from land sold to developers.

In previous years, the government went all out to curb the demand side; restrictions were put on purchases of second and third homes, down-payment amounts were hiked. But this proved to be short-term action, with limited stabilising impact on commercial housing prices. In fact, even as recent as October, prices in major cities continued to rise. Shanghai saw a 21.4 per cent increase year-on-year.

Long-term mechanism

The property sector is in urgent need of a long-term mechanism that will allow the market to adjust by itself. Long-term policy now needs to focus more on supply to ease the precarious supply-demand contradiction. Policymakers now realise that not enough attention has gone to the supply side with housing being lapped up by speculators.

Newer regulations are now focusing on first-home purchasers who are a major force in the marketplace. A great many of these buyers are young people whose incomes are too high for them to opt for low-cost government housing but too low to afford commercial properties.

To target this segment, the Beijing government announced that it will encourage commercial residential building projects to sell at 70 per cent of the market price to those who intend to live in them, rather than property investors.

The city government will offer 50,000 apartments to first-home purchasers at lower prices and this will greatly change the supply-demand structure because approximately 80,000 new units are offered each year in the city.

The policy is significant in stabilising the market because buyers can have a clear expectation of house prices over the near term and will not worry that their income will never keep pace.

The irony of ‘stabilising the market’ without hurting local government land revenue is lost in the euphoria of the Communist Party of China’s reform slogans at the recently concluded CPC session.

In a more radical approach, the party even called for the establishment of a unified market for construction land in cities and rural areas to regulate the supply side of real estate — not by the market as promised, but as always, by the Chinese state.