How to purchase a property in China (Ch…

China Vanke Co., the country’s biggest developer by market value, said an expansion into central and western Chinese cities, including Wuhan and Chengdu, helped 2010 revenue exceed 100 billion yuan ($15 billion), a target it had set for 2014, while Evergrande Real Estate Group Ltd. counted on towns in the nation’s interior to boost sales.

Cheaper land and rising incomes in inland cities are luring developers as the government targets speculators, focused on Shanghai and Beijing, with stricter mortgage requirements and property taxes. Land investment in less affluent cities jumped 35.4 percent in the past year, according to data from China Real Estate Information Corp., which tracks 40 publicly traded developers.

“Absolutely policy is a driver of this, both because the policy’s footing in more developed cities is stricter and also because there is tremendous unmet demand for modern housing in these second-tier cities where incomes are rising quickly,” said Michael Klibaner, head of China research at Jones Lang LaSalle Inc. in Shanghai.

First-tier cities include wealthier Shanghai, Beijing and Guangzhou, in southern China, according to China’s National Bureau of Statistics. The second tier includes provincial capitals and the third includes smaller cities.

Buying Land

Residential land costs in the central city of Wuhan averaged 1,662 yuan per square meter in January, compared with Beijing’s 4,145 yuan and 5,692 yuan in Shanghai, according to SouFun Holdings Ltd., China’s biggest real estate website.

“Everyone agrees that opportunities lie in second- and third-tier cities, including us,” said Yang Haisong, a Hong Kong-based spokesman for China Overseas Land & Investment Ltd., a state-owned developer. “There are more cities in that category and their home prices have more room to rise.”

Hong Kong-based China Overseas, which started expanding in the country’s interior five years ago, posted its biggest increase in sales volume in northern China in December. It sold 1.5 million square meters (16 million square feet), a 67 percent jump from the same period a earlier, in the region that includes Shenyang, Changchun, Dalian and Qingdao.

“Top cities are increasingly mature: people are actually going to be second-, third- or fourth-time buyers,” said Wee Liat Lee, a Hong Kong-based property analyst at Samsung Securities Co. “If you go to these lower-tier cities, a lot of them are first-time buyers. You are tapping into fundamental demand, with no restrictions.”

Rising Incomes

Per capita net income in rural areas rose 10.9 percent to 5,919 yuan last year — the biggest gain since 1984. Average disposable income in urban areas rose 7.8 percent. China’s economy grew 10.3 percent in 2010.

The average disposable income rose 10.4 percent in Shanghai to 31,838 yuan and 8.7 percent in Beijing to 29,073 yuan in 2010, compared with 13.2 percent in Wuhan to 20,806 yuan and 11.3 percent in Chongqing to 17,532 yuan, according to data from the local statistics bureaus.

The second- and third-tier cities will remain growth engines for developers in 2011, according to Christie Ju at Jefferies Equity Research in Hong Kong.

“China is a combination of cities: Beijing and Shanghai, which are equivalent to those in developed countries, and the smaller cities, like those in emerging markets,” said Ju, head of Hong Kong and China research at Jefferies, a New York-based firm. “Developers realized that many people need quality housing and not everyone lives in Beijing or Shanghai.”

Higher Rates

Still, the government has expanded property curbs to limit the risk of asset bubbles in the world’s fastest-growing major economy, and the central bank raised interest rates on Feb. 8 for the third time since mid-October.

“The property market is a huge bubble,” Andy Xie, an independent economist, said in a Bloomberg Television interview in Hong Kong yesterday. China may raise interest rates four more times this year to curb inflation, Xie added.

“The government is trying to engineer a soft landing,” he said. “The property market will turn.”

Vanke said yesterday it expects a “sharp” drop in sales this month after revenue in January more than tripled to a record 20.1 billion yuan. The company will pay close attention to the market’s reaction to the government curbs, Tan Huajie, the company’s board secretary, said in a statement.

China’s real estate prices rose 6.4 percent in December from a year earlier, increasing for a 19th month, the country’s statistics bureau said Jan. 17.

Property Curbs

Home prices rose 21.4 percent in Shanghai in January from a year earlier, 25 percent in Beijing, 27.8 percent in Chongqing and 16.1 percent in Wuhan, according to SouFun.

Last month, policy makers approved property tax trials on some homes in Shanghai and the western city of Chongqing, raised the minimum down payment for second-home purchases, and asked local authorities to set price targets for new properties and boost land supply.

“We believe this round of tightening is in response to recent rises in property prices, especially in some tier-2/3 cities, and reveals the government’s low tolerance of further rises at this stage,” said Hong Kong-based Peng Wensheng, chief economist at China International Capital Corp., in a Feb. 1 e- mailed report.

China last year restricted loans to developers, and some cities including Beijing limited the number of homes local residents can buy.

‘Less Incentives’

Less affluent cities will offer more opportunities for developers this year because they may not fully implement government tightening policies, said Samsung Securities’ Lee.

“The local governments will have much less incentives to really execute what the central government wants,” he said. “A lot of these cities still rely heavily on land sales for their funding.”

To boost sales, Shenzhen-based Vanke said it entered inland cities such as Kunming in the south and Guiyang in the west last year, and the smaller cities of Wuhu and Qinhuangdao in January. Vanke’s strategy of moving into smaller cities may drive their growth further this year, said Du Jinsong, a Hong Kong-based property analyst at Credit Suisse Group AG, today.

Chongqing, Wuhan

Evergrande, based in Guangzhou, sold the second-most properties following Vanke in China by volume last year, with the sales value increasing 66.4 percent to 50.4 billion yuan from 2009. More than 90 percent of its sales came from central and western cities including Changsha, Chongqing, Chengdu and Wuhan, the company said on Jan 10.

“The government’s property tightening took place in the top cities, but our sales in second- and third-tier cities are doing very well and drove our sales higher,” Xia Haijun, Evergrande chief executive officer, said at a Hong Kong briefing on Dec. 8.

In Wuhan, the new transportation hub for China’s high-speed trains, billboards line the highway offering homes from companies, including Vanke, Shanghai Forte Land Co., and Shanghai Greenland Group, the developer of the world’s third- tallest building in the city. Land sales in Wuhan rose 163 percent to 78.2 billion yuan last year from 2009, according to SouFun.

“Home prices in Wuhan were much lower compared with Shanghai and Beijing and have more room to grow,” said Li Guozheng, an analyst at the central China branch of SouFun in the city.

‘Balanced Strategy’

While China Overseas is seeking a “more balanced strategy” with expansion into smaller cities, “top cities still command a higher margin,” said Yang.

Developers should pay attention to factors such as the cities’ growth rates, infrastructure and job creation when expanding, said Klibaner at Chicago-based Jones Lang LaSalle.

“It’s a decade-long process and we are still at the earliest stage,” said Klibaner, who forecasts more Chinese developers will expand outside Beijing, Shanghai, Guangzhou and top-ranked tier-two cities. The trend is “in line with China’s overall economic growth,” he said.

Despite the series of measures the government took last year to rein in housing prices, statistics show that the number of houses sold and prices both increased. A double-digit year-on-year increase in housing prices is not unheard of in major cities such as Beijing, Shanghai and Guangzhou. Housing prices in some provincial capitals, too, have jumped by more than 40 percent.

Compared with the measures adopted last year, which raised the threshold for homebuyers to get bank loans and increased the interest rate on mortgages, the new measures are harsher, raising the down payment from 50 percent to 60 percent.

The latest document (including documents stored on the PCs which require disk cleaner to keep the data in safe) stipulates that those who sell their houses within five years of buying them will have to pay income tax, based on the entire income they earn from the transactions.

Besides, the document requires local governments to announce their targets for checking housing prices and report to the central government if they fail to meet them. In the past, the central government only asked local governments in general terms to adopt measures to curb housing prices, but this time it has put real pressure on local officials.

Another measure that will have an impact on the property market is the requirement that land demarcated for renovation of shantytowns and small- and medium-sized commercial apartment buildings should not be less than 70 percent of the total supply of land for the real estate development. Supply of land for building affordable housing units will have to be listed separately to ensure that enough houses are built for lower-income people to rent or buy at subsidized rates.

The document prevents non-locally registered residents from buying houses if they fail to pay taxes to the local government within a designated period.

Apparently, all these measures send a message that the property market should no longer be a paradise for speculators, and that they cannot earn hefty profits by raising prices artificially. If speculators are allowed to play their dirty game, the gap between the haves and have-nots will get wider and make it impossible for ordinary wage earners to buy a house.

Worse, if speculators continue to manipulate the property market, the property bubble will inflate further. And when it bursts, which it has to, it could sink the entire real estate market. That is the last thing any government would want to see.

The new measures are harsh enough to check rising housing prices. The problem is whether local governments will follow them in letter and spirit. If they do, housing prices are likely to stabilize or even drop this year. Coupled with this the building of more affordable houses will solve the housing problems of at least some low-income people.

Beijing-based Xinyuan, which builds homes in cities including Suzhou and Chengdu, may approach state companies and private equity firms to seed a captive fund, Chief Financial Officer Thomas Gurnee said in an interview.

Buying new land has “become more difficult with recent policy changes,” Gurnee said. “Construction lending is the most attractive option to us, but we can only borrow against projects we already own.”

China imposed limits on bank lending and raised interest rates twice since October to slow inflation that reached a 28- month high in November, threatening expansion in the fastest- growing major economy. Though the government suspended mortgages for third-home purchases to try to cool property demand, real estate prices rose for a 19th month in December.

While banks will still lend developers as much as 70 percent of the value of their assets, they stopped allowing companies to use money borrowed against existing projects for new land purchases last year, according to Gurnee.

“The government restrictions are working, making it difficult for us,” he said. ‘Low’ equity prices make share sales an unattractive means of financing, Xinyuan is ‘too small’ to get approval to issue yuan-denominated bonds, and bond sales in dollars are too expensive, he said.

Share Slump

Xinyuan’s American depositary receipts fell 7.6 percent to $2.43 in New York this year and have lost 40 percent of their value in the past year, according to data compiled by Bloomberg.

The company may follow Fosun Group and developer China Overseas Land & Investment Ltd. in turning to private investors as an alternative to loans, bond or share sales. A group led by Shanghai-based Fosun, a unit of Fosun International Ltd., has raised about 5 billion yuan ($759 million) since September through a private equity fund to invest in property, the company confirmed Jan. 25. China Overseas said last year it would set up a fund of as much as $500 million to finance projects.

“There will be very stringent requirements around lending to developers. Many of them won’t get funding this year,” Chris Brooke, Beijing-based president and chief executive officer for Asia of CB Richard Ellis Group Inc.

“The broader plan is to convert some of that bank lending liquidity into more institutional capital from the insurance companies, some of the bigger trust companies and some of the bigger state-owned financial organizations.”

The ministry said that more than 30 percent of the land that should have been allocated for residential housing was still going toward other uses.

In 2010, about 125,400 hectares of the 184,700 hectares the government wanted to have set aside for housing construction were actually used for that stated purpose. Those figures take into account land use in the country’s 30 municipalities, provinces and autonomous regions, but exclude the Tibet autonomous region and Xinjiang Production and Construction Corps, the report said.

The total land supply for housing rose more than 64 percent between 2009 and 2010, according to the report.

The ministry said the government tried hard to reach its goals but fell short because of inexperience, noting that the first plan for supplying land for urban housing was released only in April 2010.

According to the report, the land set aside for affordable housing, small- to medium-sized apartments and the reconstruction of shantytowns comprised 108,900 hectares. That number was an increase of 42.5 percent over the amount of land used for the same purpose in 2009, according to the report.

The report also said that the amount of land set aside for affordable housing rose by 124.5 percent from 2009 to 2010.

It said Shanghai, Zhejiang province’s Ningbo and Beijing met the goals laid out in their 2010 land-supply plans and that Shenzhen provided twice the amount of land it had hoped to set aside for affordable housing.

The ministry said the number of hectares provided for affordable housing in 2010 took up nearly 20 percent of the total land supply.

Of the total supply of land for housing, about 76.4 percent is available for affordable housing, small- and medium-sized houses and the reconstruction of shantytowns, the report said.

Dou Jingli, deputy director of the ministry’s land use and administration department, told China National Radio (CNR) on Saturday that the ministry will further strengthen its supervision of the real estate market in 2011 and that developers will be banned from land auctions if they use land set aside for affordable housing for anything but the official purpose.

She said the 2011 plan setting out goals for the use of land for urban housing will be released to the public before the end of March, adding that the construction of 10 million affordable houses will be a top priority.

Property experts applauded the government for increasing the amount of land set aside for urban housing and for its efforts to curb the soaring price of housing.

Yan Jinming, a professor of land management at Renmin University of China, said the supply of both land and money exercises a great influence on the cost of housing.

“The government is increasing the land supply for urban housing and has tightened monetary policies, which will stabilize the property market,” Yan said.