Leveraged developers a risk factor for China real estate

Leveraged developers, rather than end buyers, are the most likely source of risk for real estate in China.

And Citi says China’s efforts to rein in its property price bubble are unlikely to affect other sectors, thanks to the government’s effective control over policy.

Momentum in China real estate continues to build.

Citi says while the signs of a bubble are clear, the greatest risk within the market might not lie with the end buyers and high prices.

It says investors should watch the developers instead.

Thomas Flexner, global head of real estate, institutional clients group, Citi, says: “I think you do have to be sensitive which ones might have too much leverage, might have near term maturities, and might have a problem given the increasingly restrictive policies that China is beginning to apply to the residential sector.”

China recently raised down payment for second home buyers from 40 per cent to 50 per cent, while increasing mortgage rates as well.

About one third of end-buyers in China pay entirely in cash, while the rest fund around 50 per cent of their property buys with debt.

Citi adds that China’s tightening of the real estate sector is unlikely to hurt the rest of the economy for now, given the close control it has over policy making which allows it to introduce targeted changes as needed.

The lender says it remains confident about the long term growth of China’s emerging real estate market, given the strong demand in areas outside the first tier cities.

Mr Flexner says: “In some of the top tier cities, like Beijing and Shanghai, there’s been much more speculative investment… The other lesser cities that haven’t attracted speculators tend to be much more driven by real home buyers.”

But Citi stresses that while the long term fundamentals for real estate in emerging Asia are strong, investors should be prepared to accept a certain degree of volatility against a backdrop of fast, but uneven growth.”

Source : Channel NewsAsia – 27 Apr 2010

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