By staff reporter Han Wei

From the Caijing Annual Conference

With home sales and prices falling cross the country, China’s real estate sector is experiencing one its worst downturns. An era of high profits is over and restructuring has just begun.

This is the market scene described by property developers and economists December 12 at an economic forecast conference organized by Caijing. The consensus was that the real estate sector will play a crucial role in determining China's economic trends in 2009. But their views of the industry’s long-term outlook vary.

Hitting Bottom?

According to the National Statistics Bureau, the average property price in 70 major Chinese cities declined 0.5 percent in November from a month earlier. It was the fourth consecutive monthly decline.

China’s property outlook index, which covers price and investment trends in the sector, fell to 98.46 in November from 99.68 in October. The index has been falling since it peaked at 106.59 in November 2007.

Developer Ren Zhiqiang, president of Beijing Huayuan Group, said housing sales have totaled 450 million square meters so far this year and should finish 2008 at 600 million square meters – down 170 million square meters from 2007.

At the same time, Ren said, completed projects accounted for just 10 percent of all October construction projects, which means about 1 billion square meters of unfinished housing may be left incomplete. “The outlook is very pessimistic,” he said.

Property developer Pan Shiyi, chairman of Soho China, also expressed a negative view. “If the government had issued supportive policies for real estate sector in March, the market would have soon rebounded,” Pan said. “If it had saved the market before the Olympics in August, the market may have revived after awhile.

But in light of the government’s recently announced 4 trillion yuan economic stimulus plan, Pan said, “I don’t see when” a revival “will take effect.”

Andy Xie, a Caijing guest economist with Rosetta Stone Advisors, said it may take more than three years for China’s real estate sector to revive.

But another property developer, Feng Lun, chairman of the Beijing Vantone Real Estate Co. Ltd., was more upbeat about the future. He said economic fluctuations need not be fatal to enterprises.  Companies should learn how to react properly in crises, he said, rather than cower.

Bubble or not

As one who in 2004 warned about irrational growth in China’s real estate sector, Xie said property investment was excessive due to exaggerated expectations of returns.

But Cai Hongping, chairman of China Investment Banking at the Swiss bank UBS, disagreed. He said, over the next 10 years, China’s real estate market will remain strong. Demand will be high because more than 300 million Chinese will need to buy homes.

Wang Qing, Morgan Stanley chief economist for China, also described the sector as healthy overall, as average housing price growth has been balanced with personal income growth since 2002.

“The current problem in China’s real estate sector is neither an economic problem, nor a bubble,” Wang said. “It is actually a social problem which reflects China’s existing wealth gap issue.”

A Way Out

Pan blamed the distressed real estate sector to the global economic slowdown and the Chinese government’s policy control. “Half of the problem is because of the U.S. financial crisis, and half is because of macroeconomic control,” he said.

For the sector to revive, Pan called for adjusting macroeconomic policies s well as entrepreneur business practices.

Ren called for a tax cut or rebate for house buyers to encourage consumption. “Only a tax reduction can save the market effectively,” he said, and predicted “related policies will be issued no later than next January” by the government.

However, Xie said property developers should accept blame. Most developers overemphasized high-end housing and ignored the demands of middle- to low-income people, leading to an imbalance between supply and demand, he said.

Xie said to accelerate buying of housing inventory, developers should consider slashes prices of some projects, and the government should loosen controls on mortgages while reducing taxes for home buyers.

Wang linked government credit controls to the distress, and said the sector’s future would be determined by government policies.

At the same time, Wang said the real estate sector will be crucial to China’s economic development. If sector investments decline by less than 10 percent, he said, that along with the government’s stimulus plan will allow China’s economy to have a successful “soft landing” in 2009. But if investments in real estate drop by more than 30 percent, even the stimuli may not be able to prevent the economy from a hard landing, he said.

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