Spot-lite: How Chinese investors are skirting restrictions to gamble on the Shenzhen housing market

Published 24th February 2016, 23:30 HKT 

Whilst China’s real estate market is still struggling to deal with chronic oversupply and depressed prices, markets in larger cities have responded positively to last year’s cycle of interest rate cuts, most posting small increases in 2015.

All except Shenzhen that is, which saw new property prices leap 47.5% in 2015, and secondary market prices up 42.6%.

There are a few economic factors which might support a rebound in prices. For instance a high population density, where the equivalent of half the population of Beijing, lives in an area one eighth its size.

And where 70% of the population are migrants from other provinces, double the usual rate in Beijing or Shanghai. With only 30% of the population owning a house, it means plenty of potential housing demand from Shenzhen’s relatively young population.

Another potential catalyst was the Shenzhen government being the first region to reduce mortgage down payments to 20% back in April 2015, when a similar move was only announced at a national level earlier this month.

But is that enough to cause housing prices to jump by nearly 50% in one year?? 

A CBN report reveals this maybe more than just buoyant market conditions, rather it’s now an “investor mentality” driving the Shenzhen real estate market. And worryingly, these investors pool funds, leverage up, and are quick to dump the assets if investments fail to deliver returns in a given timeframe.

One investor Miss Wang explains how it works:

“Using crowdfunding to buy houses really isn’t difficult, it only needs a few friends to pool funds for the down payment, prepare up to two years worth of loan repayment funds, all parties sign an agreement, and then one name is used to purchase the property.

Once the price hits a predetermined level in a certain timeframe, the house is sold, and the proceeds split according to the amounts invested by each member. The general agreement makes allowances for when prices fail to rise, but if after a certain time the price gain is still not enough, then the house must be sold”.

In fact some groups of investors are going straight to property developers and agreeing to buy in bulk ‘off plan’, allowing the syndicate to then sell at a higher prices in their own time.

This smacks of cornering the market for profit, and the real estate developers which are facing liquidity shortages, are no doubt be keen to take cash up front.

But Shenzhen is still one of the large cities which has property purchase restrictions in place right? Restrictions designed to prevent investors from buying up multiple properties, and inflating property prices.

Yes, there is a regulatory run around for this as well.

Investors can setup a company and purchase ‘house bills’ from smaller (and less legit) real estate agents. This effectively confers on the bill holders, rights to purchase a particular property. These bills can be bought and sold multiple times, with values ranging from a few thousand yuan to tens of thousands yuan.

So it appears in Shenzhen at least, the high leverage gambling mentality from the stockmarket has now found its way back into the property market, risking a local housing bubble, and any property down turn morphing into a local credit crisis.

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