DECEMBER 2011 |
www.opp.org.uk
YOUR SHOUT
Property Prices Collapse in China Best of the Blogs
BEST OF THE BLOGS | 21
By Gordon G Chang on
www.forbes.com Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders have begun discounting homes in Shanghai, Beijing, and Shenzhen, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong- based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post. What started slowly in September turned into a rout by the middle of November - normally a good period for sales - when Shanghai developers started to slash asking prices. Analysts then expected falling property values to move Premier Wen Jiabao to relax tightening measures, such as increases in mortgage rates and prohibitions on second-home purchases, intended to cool the market. They were wrong. After a State Council meeting on October 29, Mr. Wen affi rmed his policy, stating that local authorities should continue to “strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.” Then, the selling began in earnest as “desperate” developers competed among themselves to unload inventory. One builder—Excellence Group—even said it would sell fl ats in Huizhou at cost. Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. Even state-funded experts are more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures. When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse. In any event, the markets are bracing for trouble. Investors are dumping both the bonds and the shares of Chinese developers, and legendary bear Jim Chanos, citing the property market late last month, said he is still not covering his short positions on China.
It’s not all doom and gloom Best of the Blogs
By Andrew Montlake on
www.corecogroup.briefyourmarket.com Whilst Europe does its best to crash and burn, the Bank of England, as expected, has held its interest rate fi rm at 0.5%. With Greece basically bankrupt and Italy entering an unsustainable phase, the UK looks like a safe harbour against the raging waves battering Europe’s coastlines. The ramifi cations of all of this are still a matter for debate and boil down to the question of whether British banks are yet tough enough to endure the crises in the Euro. Whilst borrowing costs have increased, and LIBOR is at 1%, it still does not quite feel like another Lehman’s situation. And although product pricing has increased slightly, there has been no sign as yet of any wholesale withdrawal from the lending market. In fact, there have been whispers of good news in the UK. The housing market, according to the Royal Institute of Chartered Surveyors, has just experienced the highest levels of newly agreed
sales in 18 months, whilst Halifax revealed a 1.2% jump in values in October, compared with the previous month. Many agents seem to be reporting that there is now a closer match between asking prices and off ers made. This should result in more completed purchases across the country although, as ever, London continues to lead the way. Of this activity, £3.5 billion worth of buy-to-let loans, the highest since the last quarter of 2008, were taken out in the second quarter of the year according to the Council of Mortgage Lenders. With demand for rental properties increasing all the time and rental yields therefore continuing to strengthen, Britain has seen the return of many buy- to-let investors who, having bided their time for long enough, are now itching to get back into the market. This demand has been welcomed by mortgage lenders who are keen to take advantage of the higher margins available in this arena, for not a great deal of extra risk. With rates available from just 3.19% on a tracker basis for two years (the overall cost for comparison is 5.00% APR) with a £2,450 arrangement fee at 60% LTV (loan-to-value), or 3.65% fi xed until 01/01/2014, (the overall cost for comparison is 4.80% APR) with a £2,495 arrangement fee at 70% LTV, there are some excellent opportunities around for the discerning landlord.
The Greek haircut and Cyprus Best of the Blogs
By Pavlos Loizou on
www.news.cyprus-property-buyers.com With the share price of one of the banks in Cyprus having fallen to a 12-year low, the repercussions of the 50% haircut on Greek bonds is devastating and the Cypriot real estate sector is part of the problem. Banks lend approximately €0.90 of every €1.00 they take in deposits. The remaining €0.10 they hold as ‘liquidity’. For Cypriot banks, a part of this €0.10 is held in Greek government bonds which are eff ectively bank loans to Greece. And the signifi cance of the recently agreed 50% ‘haircut’ in Greek bonds is virtually identical for them all. The ‘haircut’ reduces the amount that banks will receive from Greece when they redeem these bonds and the interest they receive from them in the meantime. Their fi rst is to issue their own bonds, i.e. borrow money from someone else. But this option is inappropriate because, as a result of the market’s low assessment of the island’s economy and rising bad debts on existing loans, the banks will have to off er bonds at high interest rates. Their second option is to attract new deposits through higher interest rates; this is already happening. However the increase in deposit rates will also increase the cost of borrowing and will lead to further damage. The third option available to the banks is to increase their share capital by issuing more shares. For existing shareholders, in order for their investment not to be ‘diluted’, it means that they will have to give more money to a bank to receive the same level of dividend they are receiving on their current shares. As a consequence of the Greek bond ‘haircut, fi rstly, the cost of borrowing on new and existing loans will increase as the banks try to recover losses from their investment in Greek bonds. Secondly, there will be a further reduction in lending by banks and stricter criteria for those wishing to borrow money. Thirdly, the reduction in loans is likely to reduce growth in the economy and lead to a signifi cant increase in fi nancial pressure on households. Finally, the knock-on eff ect will be an increase in non-performing loans which will increase pressure further.
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