The sale price of residential homes across 70 Chinese cities grew an average of only 1 percent in March month-on-month, and around 3 percent year-on-year, according to figures just released from China’s National Bureau of Statistics – a sign that the government’s cooling measures appear to be working.
This comes in sharp contrast to 2008 just after the Global Financial Crisis, when real estate prices in the same 70 cities grew 9.4 percent annually, according to NBS archives.
Tim Jowett, research and strategy director at Moonbridge Capital, believes that real estate investors in the country will now no longer be able to rely purely on speculation to drive up prices. That will lower both prices and risk in the country, he said.
“My takeaway is that the government remains committed to reigning in speculation,” he told PERE. At this point, he believes it has mostly succeeded: compared to 2010, the speculative dynamic has been “largely removed” from the market.
Jowett believes that the government is also committed to keeping speculation down. A few large cities, such as Beijing and Shanghai, saw average prices surge more than 6 percent year-on-year, and in such cities the government has announced that it will instigate a 20 percent capital gains tax on home-sale profits and increase mortgage interest rates for second-time home-buyers, according to the China Daily newspaper.
As such, Jowett thinks that most private equity real estate firms will be more cautious in the coming months about underwriting investments that bank on a significant price uptick. Whereas in the past speculation might have pushed up the expected sale price, that was not sustainable – and a number of firms haven’t been able to meet their expected returns.
“When the government clamped down, some firms got burned,” Jowett said.
As the market has stabilised in the past six months, however, private equity real estate firms have also become less speculative in their initial buying price. Because the land’s initial price is now so closely tied to its potential sale price, real estate investors are now much less willing to take a risk paying a large sum up front.
“For us, it actually lets us look at the fundamental supply and demand in the market – which, after all, is what we’re meant to be doing,” Jowett says.
Even without speculation, China’s demographics are still strong, with an expected demand of 200 million new residencies in the next ten years, he said. Importantly, Jowett believes it is still possible to achieve a 20 percent IRR and 2x equity multiple in Chinese residential real estate, even without the boost of speculation.
Moonbridge is a greater China-focused private equity real estate firm that launched its maiden $400 million fund last May. It drew the attention of the market when it included a half-time strategy vote in the investment period, a function introduced following discussions with prospective investors.