China Our big real-estate survey, Phase 2

l Global Research l Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2010 research.standardchartered.com Special Report | 12:00GMT 18 November 2010 China – Our big real-estate survey, Phase 2 Highlights • A significant supply shock is about to hit China’s housing market. It will build and remain significant in H1-2011. It could help cause prices to shift down in some Tier 2 and many Tier 3 cities. The lack of new supply in Tier 1 cities, though, should be supportive to prices. • If Beijing can hold the line on its policies, demand will remain low. Throw in a few more interest rate hikes and property tax trials and it is possible sentiment could turn and prices would adjust down moderately. However, if the economic data weaken, then expectations will turn to thinking that Beijing will loosen policy. • Construction activity growth has held up well so far, but given the imminent growth of inventories nationally, we expect developers to reduce construction in Q1. This is a key risk to commodity (steel and copper) demand in 2011. • Developers with scale, a broad base of operations, low levels of leverage and who are able to sell inventory will do OK. Small and medium-sized developers will suffer. • Until several fundamental problems are resolved, long-term expectations will not change, though, whatever happens to prices in 2011, and China’s housing bubble will continue to inflate whenever monetary policy is loosened again. Contents: Introduction p.2 I. The coming supply shock p.4 II. Our developer survey p.10 III. The policy war p.21 Conclusions p.24 Appendix p.25 Stephen Green, +86 21 3851 5018 Standard Chartered Bank (China) limited Head of Research, Greater China Stephen.Green@sc.com Jinny Yan, +86 21 3851 5019 Standard Chartered Bank (China) Limited Economist Jinny.Yan@sc.com Special Report Introduction GR10DE | 18 November 2010 2 In Beijing, policy makers are still waiting for China’s real-estate prices to adjust down. After the government threw bigger down-payment requirements, higher mortgage interest rates, quantitative restrictions on how many flats each household can buy, proof of residency tests, and (aspirationally at least) more public housing at the market – and talked a lot about some kind of property tax – prices in most cities do not appear to have budged much. Some developers have reduced prices by 5-10% for new projects, but we hear more stories of prices going up in smaller cities than we do of significant price falls in the bigger ones. Chart 1: Shanghai, Beijing and Shenzhen Primary sales (sqm floor space sold), average selling prices CNY/sqm (RHS) 0123456JanFebMarAprMayJunJulAugSepOctNovDecmn sqm 02468101214161820CNY '000/sqm2008200920102008 ASP2009 ASP2010 ASP Sources: CREIS, Standard Chartered Research While policy makers seem to believe that price falls are coming as their policies take effect, many ordinary people seem to doubt it. A survey by the People’s Bank of China (PBoC) in August showed that 36.6% of respondents thought prices would rise in the next three months, compared with 29% who thought so in May. Primary transaction volumes grew from May to September – which was a very strong month for sales – before falling again in October, in both Tier 1 (Chart 1) and Tier 2 (Chart 2) cities. Chart 2: 12 Tier 2 cities Primary sales (sqm floor space sold), average selling prices CNY/sqm (RHS) 024681012141618JanFebMarAprMayJunJulAugSepOctNovDecmn sqm 024681012CNY '000 sqm2008200920102008 ASP2009 ASP2010 ASP Sources: CREIS, Standard Chartered Research Special Report Introduction GR10DE | 18 November 2010 3 So, is China’s housing sector on the brink of a more serious correction or is the worst over? Three things that could bring prices down are: 1. Supply shock: A big accumulation of new flats which do not find buyers 2. The thousand cuts continue: Already-implemented policies continue to take effect, hurt sentiment, undermine developers’ financing, and thus ultimately turn the market 3. Another front on the policy war is opened: A major new policy package suddenly and radically changes sentiment and forces prices down This Special Report is made up of three parts, in which we examine each of these questions. • We argue that the sector is about to get hit with a wave of new housing stock, which will take the market a long time to absorb. However, this supply shock is concentrated in Tier 3 and Tier 4 cities. New supply in Tier 1 and many Tier 2 cities (where prices are most problematic) looks very limited. • We show from our survey of developers aro