Hainan fears real-estate bubbles -
again By Stephen Wong
SHANGHAI - Money has flooded into the
tropical Chinese island province of Hainan for
property speculation in the few weeks since the
central government unveiled a plan to turn it into
an international tourist resort.
More than
100 developers, including publicly listed China
Vanke, Agile Property and Poly, are believed to be
investing in properties along Hainan's coasts,
stretching 595 kilometers between Haikou in the
north and Sanya in the south.
The jump in
investment and rising valuations are reminding
local people of the island's property bubble in
the early 1990s, which, after it burst, was
followed by nearly two decades of economic
stagnation. The present property craze may be much more
intensive than last time
because Chinese enterprises and individuals now
have much more money in hand and are thus more
venturous in their investments.
At least
500 billion yuan (US$73 billion) of new capital
has poured into the property market in Hainan,
where per capita gross domestic product (GDP) is
below the national average, according to a
conservative estimate by Chinese media in January.
The inflow considerably outdistances the
island's 36 billion yuan in housing sales last
year, though even that was up 73% from 2008,
according to Shanghai Securities News. Total floor
area of housing available for sale in Hainan
cities at the end of last year was less than six
million square meters, according to local housing
authority statistics. Given an average price of
7,000 yuan per square meter (psm) at that time,
the market was worth 42 billion yuan.
The
huge inflow of funds is driving up housing prices.
The average house price rose 30% in January alone
to 10,000 yuan psm, according to Shanghai
Securities News. The price on a new housing estate
in Haikou, the provincial capital, rose by 5,000
yuan psm in a single day. In the resort city of
Sanya, the cost of a luxury house hit a record of
nearly 70,000 psm, catching up with prices in
Beijing or Shanghai.
People in China are
now joking that Hainan is quickly becoming "an
island of property speculation" instead of "an
island of international tourism".
Concerned that the craze for property
speculation may jeopardize Beijing's plan for
Hainan's development, the Communist Party's
Central Commission for Disciplinary Inspection has
sent a team to investigate whether government
officials and state-owned enterprises are involved
in any irregular activities.
The property
mania in Hainan began after Beijing unveiled a
plan on December 31 to develop the island into an
"international tourism resort" by 2020. The
pro-tourism proposals include extending visa-free
entry to foreigners, allowing inbound tourists
from Russia, South Korea and Germany to stay in
China for 21 days, granting duty-free shopping,
relaxing gambling regulations and drumming up
unrevealed amounts of money to develop the island.
The attractions of the island are obvious
- sub-tropical sunshine and beaches. Although most
of the development incentives have yet to be put
in place, deep-pocketed property-investors and
individuals who saw the potential of this
Beijing-favored island immediately joined a gold
rush. Within five days of the sate council, or
cabinet, announcing its approval of the plan,
housing sales registered 17 billion yuan, almost
on par with the total sales value in the whole of
2008.
Fearing a bubble, the Hainan
authority in January suspended land sales and
approval of new property projects. This only
pushed property prices even higher. Building lots
were sold out with their foundations barely laid,
and in the teeming sales offices, loaded mainland
investors did not bother to haggle over prices.
Local hotels are filled with house-hunters
who grab a taxi to new projects as soon as they
touch land. Some media say selling a house in
Hainan is much easier than peddling vegetables,
and that real estate ads already outnumber coconut
trees.
Rich retirees from China's cold
north have long bought apartments in warmer
Hainan, yet property investment by outsiders on
the present scale was only seen here two decades
ago, when, driven by news that Hainan was to
become a special economic zone, home prices
quadrupled in the space of three years.
The bubble burst in the middle of 1993
following belt-tightening measures by the central
government and developers abandoned numerous
unfinished buildings. Bad bank loans involved in
the projects amounted to 30 billion yuan, and the
local government spent 10 years rebuilding or
tearing down the incomplete buildings.
In
1996, construction of the 31-storey Taiwan and
Asia International Aviation Plaza was shut down
and the half-baked block became the highest
incomplete skyscraper in Sanya. After a decade, it
was auctioned by the government and renamed
Hanging Peninsula (from the Chinese name
qingtian bandao, or hanging in the middle
of the sky, meaning it's very tall).
Under
its new name, the building is being marketed as a
luxury block, with prices starting at 22,000 yuan
psm. Suites below the 20th floor are sold out and
the rest are being held back until prices rice
even further.
Hanging Peninsula's
developer, Guangdong Lianhua International, may be
proud of his foresight, but the government and
economists have ample reasons to worry about the
overheated housing market. Chi Fulin, head of the
China (Hainan) Reform and Development Research
Institute, said: "If the speculation remains
unchecked, the new real estate bubble of Hainan
will compromise or even spell doom for the
international tourism island plan."
Hainan
provincial party chief Wei Liucheng blamed the
media for the runaway housing prices and said it
"ridiculously interpreted the proposals".
In recent years, the Chinese government
has frequently formulated preferential policies
for different regions, such as Pudong New Area in
Shanghai and Binhai in Taijin, to help in national
economic development. So Hainan is not alone in
being handpicked by the central government as a
focus for development. However, no other place has
seen such a housing price spike.
Local
party chief Wei recently commented that Hainan
should never again be mired in a real estate
bubble. He also promised to step up low-income
housing projects and establish macro-control of
land supply and the housing market to ensure the
healthy development of the local real estate
industry. These measures seem so far to have had
little effect.
Wei, in a China Central
Television interview, said the 1993 bubble would
not be repeated, given changed economic conditions
in Hainan and China as a whole.
It's true
that China now has more rich people than two
decades ago, but even today an average Chinese
would be hard-pressed to buy anywhere to stay in
Hainan amid the skyrocketing prices. Should
factors such as a change in the exchange rate or
any domestic or international turbulence break
out, the hot money could be withdrawn quickly and
the housing market crash.
Academic Chi
Fulin argues that without strengthened regulation
of the real estate industry, the local housing
market will remain problem-prone and a nosedive
will almost certainly follow the price surge.
The speculation in Hainan is part of a
near country-wide housing boom since the
government introduced an economic stimulus late in
2008. Encouraged by loose credit brought about by
the stimulus package, housing prices nearly
doubled last year. The average price-to-income
ratio in Beijing has reached 27:1, five times the
world average, according to the Bureau of
Statistics of the Beijing Municipality.
Behind the property price surge in major
cities is a rapid growing stratum of rich people
with ballooning wealth and a growing fear of
imminent inflation.
The central
government, concerned about growing public
resentment and financial risks, has set out a
series of policies to curb housing prices,
including a higher sales tax, increased housing
supply and a stiffer down-payment by developers.
Other steps include building affordable apartments
for the poor, raising the down-payment rate for a
second-house purchase to 40%, and raising the
deposit reserve ratios for banks. The policies
have reduced property transaction volumes but
prices remain high.
The measures also
failed to dent the confidence of real estate
developers. They are scrambling for land now as
vigorously as before and keep pushing housing
prices high.
A recent central bank survey
shows that property is Chinese citizens' first
choice for increasing the value of their savings.
With rising inflation likely to erode the slim
returns that savers receive on their bank
deposits, property speculation is unlikely to stop
soon as a preferred option and the bubbles may
continue. Yet the increasing vacancy rate of
apartments in Chinese cities should raise the
alarm for investors.
Will the Hainan real
estate market crash? The government cannot drop
its guard; however, as for reining in housing
prices, because of the economy's dependence on the
real estate industry, the government's hands are
tied.
Stephen Wong is a
freelance journalist from Shanghai.
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