Hainan Home Bubble Pops as Curbs Deflate Prices

By Bloomberg News - Dec 20, 2011 12:23 PM GMT+0700

Zhu Lei, a property agent for the Serenity Coast luxury residential and hotel complex in Sanya on China’s Hainan island, recalls clients carrying suitcases of cash to shop for holiday apartments last year.

“We didn’t even have time for toilet breaks because there were just too many clients,” Zhu said. Today, sales in the second-biggest city on the tropical island compared to Hawaii for its sandy beaches and weather, are “bleak,” he said.

A two-year lending binge and the government’s plan to transform Hainan, in the South China Sea, into an international tourism destination helped fuel a 48 percent surge in Sanya’s home prices last year, making it the nation’s best-performing property market. As China in 2011 switched gears with policies such as increased deposit requirements designed to curb speculation, Sanya’s home prices have dropped 28 percent since last December.

“It was really no different to what was driving prices in other cities in China, which was an explosion of liquidity that caused asset inflation across the country,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing.

China spent 4 trillion yuan ($628 billion) to shield its economy as credit markets froze when Lehman Brothers Holdings Inc. collapsed in September 2008. It also encouraged banks to lend out a record $2.7 trillion in 2009 and 2010, fueling a surge in home prices and construction that it’s now battling to restrain after warning of an asset bubble.

Prices Plunge

While the rest of China hasn’t experienced a property collapse since people were given ownership of their previously state-owned homes in 1998, Hainan, part of about 200 islands that make up China’s smallest province with the same name, is in the midst of its second rout in 20 years.

Residential property prices in Sanya fell 28 percent in November from a record high of 32,020 yuan per square meter (10.76 square feet) last December, according to Centaline Property Agency Ltd., China’s biggest real-estate brokerage. Sales fell 52 percent in October to 36,600 square meters from last year, and more than 80 percent of buyers are not locals, the brokerage said.

Zhu, the realtor, sells high-end apartments in eight buildings with ocean views or overlooking golf courses in the Serenity Coast complex, which is still being built and will include five-star hotels, a music hall and water park. Zhu said only about 70 units were sold during the week-long October holiday, which “couldn’t be compared with last year,” declining to give the 2010 sales figure.

Holiday Homes

A three-bedroom apartment in the luxury development sells for about 49,000 yuan per square meter on average, while a penthouse could cost as much as 13.8 million yuan. The Serenity Marina in the project will be the host port and race village for the Volvo Ocean yacht race in February.

Globally, it’s the luxury holiday property sector of the real estate market that typically is first to fall and often drops the most when property markets sour, Jeremy Helsby, chief executive officer at Savills Plc, the U.K.’s biggest brokerage, said in an interview in Shanghai.

“You get what we call the froth of the market: it’s the first bit of the cappuccino you drink,” he said. “It tastes very good, but when the market goes down, the froth goes very quickly.”

In the U.S., Miami-area homes are selling for about half their December 2006 peak, according to the S&P/Case-Shiller index. Sanya is on about the same latitude as Hawaii and Miami.

Tourism Center

The government unveiled a plan in December 2009 to build Hainan into an international tourism center. Hotel chains such as Starwood Hotels & Resorts Worldwide Inc. and Marriott International Inc. line up along Yalong Bay, to Sanya’s east.

The island has hosted the Boao Forum for Asia, a gathering of government and business leaders modeled on the World Economic Forum and the forum in Davos, Switzerland. It also is home to Hainan Airlines Co., backed by billionaire George Soros.

China’s home prices declined in 49 of 70 cities in November from October, the worst performance this year, after the government expanded efforts to curb the risk of an asset bubble by raising down-payment and mortgage requirements. It also imposed home purchase restrictions in about 40 cities including Sanya and Haikou, the provincial capital of Hainan.

Hainan, with an economy largely dependent on property and tourism, said the real estate industry grew 2 percent in the third quarter, 32 percentage points lower than the same period last year. About 58 percent of Sanya’s fiscal revenue came from real-estate taxes last year, about the same as for the entire province.

Few Pillars

“Some areas in China are oversupplied in real estate, and the correction will be pretty big,” said Huang Yiping, a Hong Kong-based economist for Barclays Capital Research in a phone interview. He forecast China’s nationwide home prices will fall by 10 to 30 percent next year.

“Hainan is particularly vulnerable as it depends heavily on property and doesn’t have many other pillars to diversify risks,” said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc. “It’s only a matter of time until the slowdown in the property market affects China’s public financing adversely.”

About 20 percent of the properties in eastern Hainan including in Sanya may end up unfinished, said Huang Hong, a researcher at Centaline’s Hainan branch.

“Those homes are usually with high prices and no buyers these days,” Huang said. The peak property sales season for Sanya, usually in winter, won’t occur this year because buyers are in a wait-and-see mode as they watch the direction of the government’s policies, he said.

Clearwater Bay

Agile Property Holdings Ltd. (3383), the developer in which JPMorgan Chase & Co. has a 4.75 percent stake, has its biggest project in Sanya. The Clearwater Bay is a 20 billion-yuan investment including residential apartments, villas, five-star hotels, a yacht club, shopping mall and golf course. The project, which accounted for 31 percent of the developer’s total sales last year, is expected by the company to account for around 20 percent this year as sales slow.

Still, the developer hasn’t “really cut prices” at the Hainan project, Alex Liu, the company’s vice president, said in an interview. He said demand for holiday homes will remain as the country’s middle class grows.

Buyers from Beijing, Shanghai and other mainland cities make up the majority of Agile’s customers, Liu said. About 70 percent of them pay the full sum in cash, he said.

Warmer Weather

Agile shares fell 0.6 percent in Hong Kong at midday break, while KWG Property Holdings Ltd. (1813), the Guangzhou-based luxury home developer which also has projects in Hainan, dropped 1.6 percent to the lowest in three weeks.

The tropical island’s average temperature in summer is around 27 degrees Celsius (81 Fahrenheit) to 29 degrees Celsius. Its winter average of 19.2 degrees Celsius compares with 6.9 degrees Celsius in Shanghai and minus 2.9 degrees Celsius in the capital city of Beijing.

“There are tourist-type visits in some showflats, but it doesn’t turn to property deals,” wrote Citigroup Inc. analysts led by Oscar Choi in a Dec. 14 report. “Interest in Hainan property is still here, but that hinges on overall investment sentiment and it is not the right time now.”

Bubble Pop

Housing prices on the 34,000 square-kilometer (13,127 square-mile) island jumped by as much as 6,500 yuan per square meter in 1993 after it was spun off from Guangdong province as China’s biggest Special Economic Zone, according to Mizuho Securities Asia Ltd. Prices in Beijing and Shanghai were around 2,000 yuan to 3,000 yuan at the time.

When the bubble popped in 1995 as Beijing tightened monetary policy and prodded banks into canceling loans, some developers went bankrupt, leaving unfinished real estate projects and a decade-long subdued market in Hainan.

Chen Zheng, a Sanya resident and property agent who lived through the 1990s bubble, said the government’s incentives to boost the island’s tourism industry and the increasing wealth in China will help Sanya’s prices avoid an all out crash.

“I don’t think today is like 20 years ago, when there was just nothing to sustain the market but speculation,” he said. “But for sure, last year’s boom has gone forever.”

--Bonnie Cao. With assistance from Kelvin Wong in Hong Kong. Editors: Malcolm Scott, Andreea Papuc

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net