China property sector in build & balance mode

Sightseeing along China’s hilly topography is a convenient experience — escalators are neatly tucked away in the most unlikely of spots. Little wonder that global elevator and escalator manufacturers are scaling new heights in their largest market as China rapidly builds and urbanises.

Compared with sluggish sales in the US and Europe last year, the sector’s sales in China rose 15.8 per cent as new offices, residential buildings, shopping centres, airports and railway stations continued to be built. Foreign elevator brands like ThyssenKrupp, Otis and Mitsubishi are all expanding operations here — call this, a barometer reading of China’s rejuvenated property market rising after a government induced three-year lull.

The Chinese economy may have slowed to 7.6 per cent in the first half of 2013, but the real estate market is posting strong growth. Estimates conducted by various real estate and foreign rating agencies indicate that on average, property prices are expected to rise at least 10 per cent in the next six months. The residential home market will remain robust in the second half of this year as construction projects which had come to an abrupt standstill are now being fast-tracked.

Balancing act

Despite the sudden gallop in property, there remains a bit “but”. Construction and property is a double edged sword for the economy. China must build, but it also must balance. In the past, public anger over runaway home prices on one hand, and danger of over-construction, on the other, had compelled the government to contain the red hot real estate industry. The state had introduced a raft of control measures such as ban on third-home purchase, property tax trials and widespread low-incoming housing construction.

But these policy measures were widely criticised as mere temporary steps to rein in home prices, vulnerable to drastic rebounds and overheating once the curbs got lifted. This time though, the government is coming out with a long-term mechanism to “nurture” the real estate market and make it more sustainable. This “mechanism” will not only adopt economic measures such as taxation and credit policies to regulate the market, but will also remove local government’s interference in skewing the property market and sky-rocketing prices.

Fiscal green

Some urgent balancing work also needs to be done with regard to the environment cost. Over-construction and unprecedented concretisation is fast becoming a bane for the economy. China’s energy efficiency level is low due to its overall mode of production; it contributed to 8 per cent of the global economy in 2012 while it consumed almost 18 per cent of the total energy generated.

Fifty per cent of China is already urbanised. Driven by this huge demand for space, about two billion square metres of new buildings are being constructed every year. Majority of these new high-rise structures use high levels of energy. China has explicitly stated that constructing “green buildings” is one way of meeting the target of reducing energy consumption by 16 per cent and carbon emissions by 17 per cent for every unit of gross domestic production by 2015. Because the building sector consumes more than one third of the total energy in China, there is still a long way to go.

Policy-makers, therefore, have to work out a sustainable urbanisation model, one that will be built on a “green economy” and enforcement model. Reform in this sector would need “green finance”, or regulations which compel financial institutions to assess potential environmental impact of their decisions, while issuing loans to businesses and entrepreneurs. Financial institutions and regulatory bodies will have to compel real estate companies to weave in sustainability into their balance sheets, while adopting the more stringent green building norms.

China’s biggest challenges in the years to come will be two fold — encourage its building sector to sustain economic growth, while simultaneously enforcing environmental discipline through fiscal measures.