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China: Top 10 Residential Trends
19 Apr 2009
A recently published white paper outlining trends in China’s residential real estate market highlights the top 10 predictions for this asset class and gives prospective investors an insight into the future transformation of the market. magazine reports
The housing reforms of the early 1990s changed China’s residential sector from a government-controlled market to one in which private players had the opportunity to introduce new standards of housing. Prashant Das, author of a recently published white paper entitled ’10 Future Trends Shaping the Chinese Residential Real Estate Market’ heralds this as the beginning of a new era of residential development for the country.
More recently, the government has imposed various regulations which have strong implications for future residential development. Monetary policies are being practiced to control real estate market growth with banks imposing a minimum of 33 percent equity requirement on residential development borrowers. Government policies also require residential developers to include a fixed minimum proportion of affordable housing in their product portfolio and speculation is being controlled by more strict property transaction laws. Corporate income tax, labour contract and anti-monopoly laws additionally help the government exercise greater control over companies, especially foreign enterprises; and in mid-2006 a capital gains tax of 5.5 percent was enforced on the sale price of a property if the owner sold within two years of title issue.
While China’s government policies are becoming more market-friendly, they have also been used to shape the private housing development industry in a particular fashion, according to Das. The background study for the white paper includes a comprehensive survey of the past and future trends in the Chinese residential market, treating the US as a benchmark.
The potential growth of the residential sector will see Chinese residential developers build more than 100 million homes in the next few years. Das’ paper states that house price indices are in a phase of stabilisation which indicates a maturing homebuilding market, but with multiple opportunities.
1. Consolidation of residential developers
The trend of consolidating residential development entities is fuelled by the advantages large residential developers have over smaller ones in the capital market, and sales volume. Three top real estate enterprises in China take up around 15 percent of the national market share. Several consolidations with mergers and acquisitions have been taking place at multiple levels – local to international – and the trend will continue in future.
2. Mass customisation of new homes
As the customers remain dissatisfied with the poor workmanship and construction delays of shell houses (maopei), custom-designed interiors will gain popularity. The government, too, has started mandating the builders to pre-install the features. Customisation at mass level will benefit from the knowledge and experience of American players.
3. Affordable housing made profitable
As the gap between demand and supply widens, the Chinese government is ensuring that more affordable houses will be made available to the burgeoning class of middle-class buyers. In spite of increasing volume, the share of affordable houses in China has been decreasing. This trend will reverse and both the realtors and the government will learn from the USA about how affordable can be made profitable.
4. New business models
With the adoption of a City Planning Law in 1989, Public Private Partnerships (PPPs) will be the next big thing in the Chinese residential real estate development sector. The know-how of successful PPP models will be borrowed from successful foreign counterparts. With the new type of non-conventional ‘condominium’ development model, Chinese developers will take help from global real estate and management consulting firms.
5. New construction: material and processes
The Chinese Ministry of Construction introduced a new building code in 2003 that, for the first time, included provisions for wood-frame construction. The proportion of such homes has been considerably low so far (only 0.05 percent), yet they represent a large number (50,000) which is poised to grow in the future. In addition, several new business avenues for the homebuilding sector will be opened, including prefabricated houses.
6. Maturing of the residential mortgage market
Chinese banks are traditionally biased towards primary mortgage loans, and the secondary market is under-developed. This will create opportunities for a competitive secondary market in China. Given stringent underwriting processes, the market is not likely to suffer a self-caused credit crunch. As the international market will recover from the credit crunch, the global mortgage players will try their luck in the Chinese markets, making it more competitive.
7. Inland development
China has come to realise that the development of economic activities in the western inlands will be the key to greater economic success, and several steps have been taken to achieve this goal. Several big multinationals have already moved their operations to the inland areas. This trend will continue, and give rise to tremendous growth of the housing market in the western inlands.
8. New business opportunities
The ridge between ‘economic analysis’ and ‘market analysis’ is deep for Chinese residential developers, hinting at a need for dedicated firms that could provide project-specific data and analysis. The legal due diligence process is less formalised in China; thus creating opportunity for title insurance companies as the real estate market will grow more complex with time. Also, as two-thirds of mortgage insurance is dealt by public entities in China, private players will capture a good market share in this domain.
9. Application of IT systems
IT has increasingly been used by homebuilders in expediting material management, quality control, project scheduling, job costing etc. Significant activity can be noticed in the area of setting up brand new Customer Relationship Management (CRM) systems in the Chinese residential development sector. In order to gain a competitive edge, more developers will purchase IT solutions for Enterprise Resource Planning (ERP), CRM and construction-specific Supply Chain Manangement (SCM) systems.
10. Sophistication of supply chain process
Construction activities shall be optimised for time and cost, and a well-established Supply Chain Management system for building materials and other construction resources is the next big thing in the Chinese residential development sector. Prefabricated homes will be another factor that will encourage a more sophisticated supply chain management. As the IT industry has already penetrated deep into China, the expansion of SCM in residential development is a phenomenon which is more than likely to happen.
About the author:
Prashant Das holds strategic business development experience in emerging markets working with multinationals. He has engaged in several research projects with non-profits ands corporate organisations in India and the US. His special interest lies in international business and real estate development, especially in India and China. This paper was produced with the support of RealFoundations, Inc., Dallas, USA.
Source: Cityscape Magazine