Analysis on the real estate market Xiamen 2006

Sources: www.xmhaiyun.com       

Under the big environment of stable real estate adjustment and controlling policies and bank rates, the real estate market of Xiamen has entered a self-adjusted stage with certain circulations. In 2006, the city real estate market will still in speculation and observation since it has reached its peak in this circulation. The number of concluded business will gradually settle to a stable number. There will be new balance between the need and consumption with a more stabilized structure. The tight and strong trading market of the city real estate market will gradually become loose and level off. Some of commercial buildings with large areas and disadvantages in pricing may experience a new round of bad sales. In 2004 and 2005, some developers had experienced the great difficulties transferring the high cost to the sales prices.

The Macroeconomic Environment

The macroeconomic adjustment and controlling  

There will be little huge change in the macroeconomic adjustment and controlling policies. Every policy on the real estate market has been under serious consideration and is made to be sustainable and harmonious with the previous policies. Government of different levels may not adjust the policies in the short term, however, some little change and some controlling policies may be launched in the local level to code with the  speculations in the real estate market.

 The Bank Rate of Interest Factor

On 29^th October 2004, the China Central Bank raised the ratings for the first time in the past ten years, increasing the ruling rate of interest by 27 standard points. On 17^th March 2005, the Central Bank again cancelled the beneficial interest of rate on private loans for residential use, making the rate of interest back to the original ruling rate of interest and implementing the management of the bottom line set at 0.9 times of the standard ruling rate of interest. Meanwhile, the payment of those districts going through price rising on residential buildings was approved to raise from 20% to 30%. This measure caused the increase of the rate of interest on private loans on residential housing. Since 29^th October 2004, the average rate of interest of one-year RMB loans was around 5.58%. In the third season of 2005, the average rate of interest was adjusted to 6.81% which was 1.22 times of the standard ruling rate of interest. Currently, the rapid development of the national economy has entered a circulation of interest-adding period. As predicted by experts, this circulation may last for at least 3 years. The intervals between each different individual circulation may be longer and longer with smaller and smaller interest-adding scale. Due to a lot of particular problems emerging along in the national economy development, the interest-adding has always been very serious and cautious, and would always under the direction of certain financing policies. In this circumstance, it is very unlikely that the rate of interest will be readjusted again within one year. On the other hand, the adjustment of interest will be most likely to be achieved by the market itself. Generally, the ruling rate of interest for bank loans may be likely to be raised to 6.5%~7.5% in the coming 2~3 years. The interest-adding will also inevitably effect the consumption of the real estate market and the investment. Both investors and consumers may face certain level of risks due to the interest-adding.  

The Market Climate

The supply factor 

In 2005, the commercial buildings newly-opened to construction in Xiamen increased significantly. In the third seasons of the year, the areas of commercial buildings newly-opened for construction reached 1.5 million square meters. The total areas newly-opened for construction in the first three seasons of this year reached over 3.3 million square meters with a huge growth by 79.95% compared to the year 2004 (2.9 million square meters). This total number almost equaled the total areas of the whole year of 2003. Most of these areas were located in the Xiamen Island District. According to some statistics, the total area newly-opened floor space for construction in the last season of 2005 was over 1.4 million square meters, which means the total area of the whole year of 2005 was over 4.7 million square meters.

Talking about the land-leasing situation in 2005, the total area of public land leased for business reached the top record of the past three years. The supply would be sufficient in the near future. The total area of public land leased for business reached 1.49 million square meters and 3.03 million square meters for construction. More detail measures and regulations on construction and completion times had been lined out by the “Xiamen Land-Leasing Contract of State-Owned Lands”, in which regulations had been made to have serious fining measure for those developers who didn’t obey the related regulations. According the Contract, the land gained by December 2005 will have to be under construction no later than 8th December 2006 and no early than April 2005. The completion time of the major projects on the same piece of land will have to be no early than September 2007 and no later than December 2008. Meanwhile, there were still a large number of lands leased for commercial use left from the history needed construction shortly. According to statistics at the beginning of 2005, the total area of this type of lands reached 3 million square meters with the construction area around 6 million square meters. Most of these lands also were located in the Xiamen Island District. According to the Contract and some government regulations, these lands should be opened to construction no later than 2006, or the lease will be regained back by the government. Calculated by this standard, there will be 4~6 million square meters of land opened to construction in the year 2006. While the current market trading on the real estate market has been suffering from distinct decrease, the supply of commercial buildings for the years of 2006 and 2007 should be more than enough, which also will be another challenge faced by the city’s real estate market. 

The Need and Consumption Factor  

The following statistics revealed the general business situation of the real estate market of this city after the implementation of the national macroeconomic adjustment and controlling policies since April and May of 2005. During the first nine months of 2005, the total area of commercial buildings on sale was 2.31 million square meters with a decrease by 21.09% compared to the same period of the previous year. The total area of commercial buildings on sale in the third season was 622,900 square meters with a distinct drop by 38.23% compared to the year before. While in the last season, the total area of commercial buildings on sale was 909,400 square meters with a drop by 11.52%. After the adjustment and controlling by the national macroeconomic policies, the trading in the real estate market continued to be gloomy with clear climate of speculation and observation. In October, the situation was slightly changed with some little increase on sales. This trend lasted till the following November and December. However, according to the analysis and previews on the real estate market, this growing in sales will be likely to last for a long while. 

1.   Most of the current consumers were passive buyers. Most of these consumers purchases were for urgent private use within the coming one or two years, for instance, the need of new housing for marriage or the need from those new immigrants settling down in this city. According to the investigation from most of the major sales sectors of commercial developers, though in the last season the number of consumers inquiring for information grew rapidly, still the number of actual completed deals remained to be very low. Most actual buyers were those who had been observing the market for a long time or those who were not that sensitive to prices.

2.  A lot of housing was opened for sale in a similar period of time. The completed deals in the market concentrated in certain period of time somehow enlarging the actual consumption need, ending up stabilize the general prices. Within the 50 days between September and November, the number of commercial housing communities opened for sale was over 30 with one or two new communities opened for sale each single day. Most of these communities were concentrated in the Xiamen Island District. The officially approved commercial housing area for sale in the last season of 2005 reached 1.506 million square meters taking up 78.50% of the total area on supply of the whole island district, which was three times more than the previous season and the largest area of the whole year. The actual area sold out in the same year reached 3 million square meters, which was a very encouraging figure. At the same time, more and more customers and relations were built up during the first three seasons, ending up the completed trading was greatly promoted in the last season at very stable and rational price level. However, this didn’t indicate the resuscitation of the real estate market of the city, it was still worse than predicted.

3.  Currently, the most population type of residential housing were those with the areas ranging from 110 to 130 square meters. The restrictions that used to have on those large-area commercial housing of the area over 150 square meters had been lifted earlier. According to the trading records of October and November, the commercial housing sold out were mostly those with the areas ranging from 110~130 and 80~100 square meters. According to a regulation issued on July 2004 by the municipal government, the commercial housing within the Xiamen Island District would no longer plan for those types of housing with the areas no more than 150 meters. While 60% of the commercial housing in the current market was completed by the time of the issue of the regulation, which ended up that there were still a lot of mediate-area and small-area housing available. These types of housing would have the priority of being promoted on sales in the future.

4.   The number of trading completed will gradually stabilized. As the effect by the macroeconomic adjustment and controlling and the residential housing innovation melted away, the local real estate market would enter the self-managing and adjusting stage with more mature system. Consumers would also become more and more rational after the purchasing peak period. The tax factor may also delay the purchasing plan of the consumers for residential housing. As a result, the actual concluded trading on commercial housing real estate market will slow down and finally settle at some steady level. 

The market price factor  

In general, the price level of the real estate market of this city continued to grow modestly in 2005. However, due to lack of the stimulus from actual materials supports, the price level is less likely to grow strongly.

1.  The prices of most of the commercial residential housing in current market were lower than expected. Due to the gloomy situation one year ago, though the local market began to experience some growth since October, the sales situation was still not that optimistic. There was still strong atmosphere of speculation and observation. All of the above indicated that there was still no sign of resuscitation. Since the implementation of the macroeconomic adjustment, the number of trading in the local real estate market dropped quickly creating more pressures for the market. Some developers tried to lower the sales price to raise the sales number in order to fasten the capital flows and ease the huge pressure. 

2. The average price for commercial buildings in this city now ranges between 5,500~6,500 yuan per square meter, which is actually higher than the resident income level. Due to the radiation effect of this city to its adjacent neighboring areas, it can still attract some mediate-class and high-class customers out of the city. Seen from this perspective, it is understandable that the price level is not necessarily valued according to the income level within the city itself. The focus should be on the consumption proportion of the local residents and buyers out of the city. If the market price is largely deviated from the average purchase capacity, it is inevitable that the price would have to re-adjust itself according to the market equilibrium.

3.   The price level of the local real estate market is less likely to fluctuate in the short run with little opportunity of experiencing “huge increase” or “sharp dropping”. The increase in prices in recent years was mostly due to the conflicts among the actual residential need, rational investment and the imbalance of supply and consumption. There was no sign of real estate bubbles. However, fluctuation may exist during the transition period of the structure change. The real estate market in this city has entered a self-adjust period without possibility of huge fluctuation. Some of the commercial buildings may continue to promote their sales by controlling the prices. The trading price will go lower and lower by tiny scope.

4.     In the second and third seasons of 2006, due to the market pressures, some developers may have to keep lowering their prices in order to promote sales. According to some analysis and statistics from 2005, only very few of developers were not affected by the current climate with the trading reached as high as 70% of the buildings on sale. While most of other developers were not so lucky with the trading only at around 30%~50%. After the short growth during October and November, the total trading in the market was gradually stabilized. The increase of the price in 2005 was partly due to the insufficient supply. In 2006, since the supply in the market will grow hugely, the buildings opened for sale in the end of 2005 may have to face the pressures from the buildings newly opened in 2006 with more choices and possibly less expensive prices. The developers will promote the discount of purchases as one efficient way of promoting sales and accelerate the reclaiming of investment. 

5. In the coming years, the real estate market may be re-adjusted to be more mass consumption level instead of staying on the high-end level. The price level is more likely to match the average resident income level. Currently, most customers who have the purchase capacity were those more high-end residents with steady and satisfying income, while most of ordinary citizens still have great difficulty purchasing satisfying residential housing. According to the statistics, 70% of the middle-class and high-class residential buildings were purchased by 20% high-income people. That is the point that why the rate between "price of residential buildings" and "income of buyers" remind sharply, meanwhile the price of residential buildings could remind in a high level. With the increase of household income of people, the buyers of commercial buildings will shift from middle and high class customers to a wider range with mass consumption.

The competition

The competition among real estate enterprise in 2006 will be even fiercer. They have to face the competition not only from the housing released in 2006, but also the pressure from the housing opened in 2005.

1.   In 2004 and 2005, developers could only purchase the land for development at very high prices. However, there have been great difficulties transiting this part of cost into the housing prices later on due to a lot of factors mentioned above. Currently, the land price for floor area is around 3,300 yuan per square meter. The land price for floor area in some downtown area reached 4,900 yuan per square meter. In the situation of gloomy market climate and diminishing trading, the most effective way to run the business is to lower the unit price to promote sales, though this measure will certainly cut back the benefit.

2.   The traditional management mode of the city real estate market also is needed upgrading. The traditional mode has been largely influenced from the Taiwan side with new ideas as the cores to attract customers. This may work well for the market in the primary development stage. However, it is not going well with more mature and rational market. How to maintain the profits and introduce new advanced management mode to promote market sales has been a key problem faced by real estate developers in the near future.