Wang Shi, the founder and chairman of China Vanke, the largest real estate enterprise in China and the largest residential real estate developer in the world. Photo: image.baidu.com
Real estate giant Vanke has applauded government regulations to cool the housing market, while expressing concerns that the efforts to quell excessive price hikes may not be sustainable. Analysts believe that the traditional real estate development hinging on land and capital should go through transformation to be more service-oriented and high value-added amid a glut in many lower-tier cities in China.
The year 2016 has witnessed China’s real estate market boom to a level that has alarmed the government. The new regulations rolled out since September 30 have led over 20 cities to put caps on loans and purchases, and the restrictions have proven to be effective. Caixin, one of China’s top media groups providing financial and business news, held a summit last Saturday to discuss government regulations and opportunities in the sector.
Effectiveness of regulations
From the second half of 2015 till now, a dozen of first-tier and hot second-tier cities in China have seen housing prices rocket up. Greg Peng, the founding partner and CEO of the Cindat Capital Management, analyzed that a large amount of floating capital has pushed up housing price.
“To spur on the economy, the government has injected a large amount of paper money into the market. A gloomy real economy means the liquid capital could hardly yield as much profit as it will do in the real estate sector. For both Chinese institutional and individual investors, real estate is good capital to hold. As a result, more and more money has flowed into the sector, pushing up prices.
Wang Shi, the founder and chairman of China Vanke, the largest real estate enterprise in China and the largest residential real estate developer in the world, presented his views at the forum by upholding government’s regulation of the market amid unreasonably surging prices. He believes it is unhealthy and risky to have housing prices swell beyond the reach of common people.
“China is not a market economy, nor a planned one. Under the circumstances, extremely high housing prices must be dealt with. I supported it all along, although I wonder if the regulations could be sustained. Considering real estate is a special sector, regulations may lose momentum at critical moments,” he said.
From the end of September till now, over 20 cities have rolled out their specific policies to restrict mortgage loans and home purchases. Although the measures soon worked out, many industry insiders share Wang’s concerns.
“If there was no real estate and infrastructure, China’s 2015 GDP would grow at around 4.4%. And it would be impossible for the GDP growth rate to reach 6.5% in this year and next year, unless breakthrough development happens in other industries,” said Goldman Sachs's chief investment strategist Ha Jiming. He is also concerned that as the economy experiences a downturn, regulations on the real estate market could face big challenges.
More specialized real estate developers
Ten years ago, Vanke predicted that that by 2016, five of the top residential developers in the world would be Chinese companies. Now, eight of them are Chinese companies. “This is beyond our expectation, indicating the huge potential of the Chinese real estate market,” said Wang Shi.
Analysts generally believe that after the period of reckless growth has passed, a more mature market would demand high-quality real estate development.
Chinese developers tend to be too ‘versatile’—they acquire land plots, do architectural design, construct, sell and manage properties. Wang believes it’s time for developers to change that model. In his views, developers should try to be more specialized.
“They could be land bankers, real estate projects operators based on financing capacities or contractors,” said Wang Shi, adding “if I remain here in Vanke, it would become a professional head-contractor of high quality residential buildings. “This is our prospect for the future 10 years,” he noted. Vanke is known to have long put its strategic emphasis on residential mass production and green architecture.
Vacant homes have featured many lower-tier cities in China and lead to low rent price and unprofitable property management business. The situation has put almost all medium-sized and small developers in a difficult position.
Yi Xiaodi, chairman of Sunshine 100 China Holdings, a private real estate developer, suggested some Chinese developers to restructure themselves. “They may earn more profit from managing properties and leasing. To run those properties with potential to gain long-term growth in rent would be one of the areas that developers could explore in the future,” he said.
Land lease system questioned
Wang suggested unbearably high prices and messy urban development are related to China’s system of local governments leasing land. Nowadays, only mainland China and Hong Kong are adopting the system. “In 10 years, our land lease system would be changed. Although people may curse developers all the time, they know it is the system that has caused high prices,” he said.
In his view, it is not good for a government is to be too dependent on revenues from leasing land. He used Shenzhen as a positive example. “Land lease used to constitute 40% of the municipal government’s fiscal revenue, but now the ratio has gone down to 3%, making it a city on track of healthy development.”
Although Hong Kong is also leasing land through government, Wang suggested Chinese mainland to learn from its high efficiency in planning and using land. “If Beijing could be 50% as efficiently planned as Hong Kong, it could well accommodate 100 million citizens.”
A government document that instructs cities across China to pull down walls of the enormous numbers of gated residential compounds to ease traffic congestion aroused public controversy at the beginning of the year. The measure was interpreted as an effort to do better urban planning.
The Communist Party of China Central Committee and the State Council issued guidelines on urban development at the time to deal with "urban ills" resulting from poor urban design. These ills include congestion, pollution and designing either over-large buildings or those which are too exotic.
However, till now, the “tearing down walls” initiative has not been implemented, although it is a common practice in many western countries.