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Home ownership is a relatively new concept for many Chinese, but in the decade that it's been possible, a super-heated market has developed. The government has stepped in to tame the sector.
By KRIS HUNDLEY
Published September 19, 2005
[Times photos: Bob Croslin]
Residential towers dot the landscape in Shenzhen, China. With China's growing economy creating higher-paying jobs, families put new homes at the top of their wish lists.
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SHANGHAI, China -- Beyond the bubble, beyond the forest of cranes and bamboo scaffolding, beyond the staggering number of luxury high-rises here, there is one bedrock reality underlying China's residential real estate market: It is less than a decade old.
Until the mid 1990s, China's 1.3-billion people lived in state-owned property. They could not buy or sell their homes so there was no incentive to make improvements, even though the places usually were cramped and poorly built.
Then the government, which had embraced its blend of "socialism with Chinese characteristics" a decade earlier, got out of the public housing business. It allowed people to buy their apartments at a significant discount, creating a real estate market where there had been none.
Yang Jianping, an executive with one of Beijing's largest real estate developers, described it as "the process of turning people from proletarians into people who own property."
Newly minted homeowners promptly began parlaying what they had into something better. With China's growing economy creating higher-paying jobs, families put newer and bigger homes at the top of their wish lists. State-owned banks made those dreams accessible in 1997 by introducing consumer mortgages at rock-bottom interest rates. Eight years later, they had handed out nearly $200-billion in home loans.
Speculators, domestic and foreign, were drawn to China's property market for the same reasons many Americans have put their money into real estate in recent years: It's an attractive alternative to an unreliable stock market. A survey this year found that about a third of the buyers of high-end Shanghai properties were investors.
"Chinese people don't have many investment channels," said Zhang Qian, deputy general manager of Greentown, a private development company in Shanghai. "The real estate market is easy to get in and get out and the trading cost is relatively low."
China's residential market has been hottest in Shanghai, which surpassed Beijing in 2003 as the country's priciest address. Average home prices in Shanghai rose 14.6 percent last year to an average $70 per square foot. Within the city's highly desirable central district, prices rose 27 percent last year - and 68 percent over the past three years - to more than $109 per square foot.
(That's still a bargain compared with U.S. prices for similar high-end, urban projects. The Trump Tower being built in Tampa, for instance, has units selling at top prices of $1,000 a square foot.)
Blaming the runaway real estate market on energy shortages, higher commodity prices and unaffordable housing, the Chinese government has taken steps to tame the sector. In the spring, officials started banning buyers from flipping unfinished apartments, levied a 5 percent capital gains tax on sales of homes owned for less than two years and raised down payments and mortgage rates.
Though foreign money continues to flow into the market, the government's moves have had a substantial effect on domestic demand, especially in super-heated markets like Shanghai.
A report in September by Deutsche Bank said the regulations have knocked the wind out of the speculative end of the market in Shanghai, cutting sales in half and prices by as much as 15 percent over the past four months. The biggest drop has been in overbuilt suburban areas, with prices in central Shanghai holding steady, thanks to strong demand from foreigners.
"This is a very chaotic time," said Greentown's Zhang. "Some people are rushing to sell and buyers are just watching the market."
Zhang has had a ringside seat on the action in Shanghai as point man for his company's high-rise condo development in the upscale Pudong district. A chain-smoking 40-year-old, Zhang left a government policy research job four years ago to join privately held Greentown. Greentown's owner, Song Weiping, started the company 10 years ago with less than $20,000; he now ranks among China's 100 wealthiest men.
"I was never good at being an official," said Zhang, who is dressed casually in a black knit shirt and pants accented by a heavy silver watch. "I saw the rapid development of the Chinese economy and switched to business. Now my income is like three times what I was making as a government official."
Since 2001, Greentown's sales more than tripled to $423-million. During the same time, the company's construction starts - single-family villas, condo high-rises and commercial projects - increased six-fold to more than 22-million square feet. Zhang confidently predicts the company will match that construction record this year and exceed $480-million in sales.
While Greentown is based three hours south in Hangzhou, and has done most of its development there, a few years ago it ventured into the luxury condo market in Shanghai. The result is a community of brown brick high-rises with curved balconies overlooking tidy green grounds. Signs in English and Chinese remind residents to "Cherish flower and grass" and directs them to underground parking with the warning "No piping" (honking).
About a third complete, the project will have 3,000 units and 35 buildings ranging from 12 to 35 stories in 2007.
Zhang said the first phase of Shanghai Greentown's 1,000 units sold in one day in May 2003. Prices ranged from about $90,000 for a 1,200-square-foot apartment to $250,000 for a 3,200-square-foot penthouse with a view of China's tallest skyscraper.
(Like most new condo projects in China, Greentown's units are sold as concrete shells, with buyers responsible for everything from plumbing to paint.)
Those same units in Shanghai Greentown were reselling for 150 percent before the changes in government regulations in May, Zhang said. And most of the resales are in concrete-shell condition: Of the 1,000 units sold in Shanghai Greentown's first phase, 200 were occupied. The other 800 were not homes, but high-stakes bets by speculators in Shanghai's market.
"Most of them are sitting there empty," said Zhang, as he showed visitors around the oddly vacant project. While workers were busy finishing the complex's community center and security guards were patrolling the property, residents were nowhere to be seen. Occupied units were easy to spot: laundry hung off the balconies, a Chinese tradition at odds with Greentown's sophisticated modern architecture.
Even Zhang, who is reaping unimaginable riches from real estate's run-up, said the market was out of sync by last spring. "The people, the market, has lost its senses," he said. "If the situation continues like this, we'll kill the chicken to get the eggs."
Like real estate developers worldwide, Zhang is optimistic. He thinks a shakeout will eliminate smaller developers and speculators, leaving bigger players like Greentown to meet the unrelenting need of China's populace for better housing.
"All housing constructed before the 1990s was very shabby; it's not what people can live in," he said. "So I still think the long-term market for residential housing is good."
And while Zhang knows the Chinese real estate market is in its formative stage compared to that in developed areas like the United States and Europe, he sees no reason his fast-changing country can't catch up.
"China has the same soil," he said.
-- Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.
[Last modified September 19, 2005, 06:47:02]
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