Macquarie Research China property sector
8 January 2019 6
Price restrictions – the first administrative measure being relaxed
Price restrictions have been introduced widely by local governments since early 2017. A price cap is a
powerful administrative, though distortive, measure to curb property prices, in our view. Price restrictions
not only affect a property project’s ASP and profitability but also slow the pace of project launch, volume
growth and in some cases buyers’ financing. We believe the local governments aim at keeping both ASP
and sales volume stable. Developers are advised of an ASP (price cap) when they apply for a presale
permit for a project. Some developers hold back their launches when the ASP guided by the local
government is much lower than their expectation (some are even lower than the secondary housing price
or at par to the recent land price). However, execution varies across cities and even across districts in a
city. Some developers/projects in some cities/districts are able to get around the price cap by using double
contracts for a property transaction – one being the property contract with an ASP in line with the
government’s agreed price while the other is a furnishing contract making up the shortfall to the “actual”
price. In this case, a price cap does have a negative impact on buyers’ financing. Developers with
nationwide footprint or diversified portfolio should have better flexibility to adjust their launch schedule and
minimise the impact.
The short-term demand-supply dynamics are distorted by price restrictions – primary home price, in many
cases, is cheaper than secondary prices and buyers enjoy immediate paper gains after a home purchase.
Developers are able to leverage their reputable brands to attract quality buyers who are able to pay full
cash or a large down-payment. Thus, price caps often result in improper property selling activities. Many
cities consequently further regulate property sales and crack down on illegal activities. For instance, a
lottery system for property sales has been introduced in some cities and this means developers are unable
to take full advantage of their strong brands to maximise cash collection. In some cases, developers are
required to allocate a certain percentage of supply to rigid demand and they are not allowed to give priority
to preferred buyers – those who are able to pay full cash or use Housing Provident Fund. Having said that,
some leading developers are still able to lock in quality buyers with higher upfront cash payment.
We have seen different degrees of easing of price restrictions in various cities since the housing market
started cooling down. On 22 October 2018, Guangzhou removed double contract and eased price
restrictions in three outskirt districts, namely Zengcheng, Nansha and Huadu. Real transacted prices can
be and should be registered with local housing authorities. No double contracts are allowed or needed. We
believe the move reflects the Guangzhou government’s concern on the potential risk of a weakening
housing market and of social disharmony. Buyers will have less burden in the form of downpayment, with
the total lump sum home price being eligible for mortgage. More importantly, the change in policy stance
has helped a recovery of the buying sentiment.
Scrap of presale system – unlikely
Market discussion on the scrapping of the whole presale system was triggered after the Guangdong Real
Estate Association provided its feedback on China’s property presale system to the Ministry of Housing on
21 September 2018. We believe the suggestions by the Association do not necessarily imply any policy
direction/stance. The housing authorities already clarified the market misunderstanding through local
media. There were some cases in which sales of completed properties were required for land sales in
Southern China. We have seen no city-wide or nationwide implementation. In view of a cooling land
market, abolishment of the presales system is unlikely. We think it is too risky to suddenly end the presales
system. Presales play an important role in the fast asset churn model by funding the initial investment such
as land and construction capex. Presales can commence as early as 6-12 months after land purchase,
while construction takes 24-36 months to complete. If presales are abolished and only completed
properties can be sold, it would delay cash collection by 18-24 months. Property developers would have
substantial cash flow pressure. On the other hand, secondary housing prices would rise with supply
shrinking sharply. The land market may yet cool down, as developers have weak balance sheets and cash
flow for further investment. We expect this to have negative implications for the whole supply chain
(cement, steel, electrical appliances) and GDP.