Big believer in real estate now a skeptic due to sluggish sales

Some property industry insiders suggest China's real estate market, especially in smaller cities with oversupply, now faces serious problems. [Photo provided to China Daily]

Real estate tycoon Ren Zhiqiang never seems to be afraid to air his views, often in strong terms, and when he airs them, a lot of people sit up and take notice.

But one of Ren's recent prognostications has drawn more interest than usual because he seems to have had a complete change of heart on where the Chinese property market is heading.

Over the past few years, Ren has gained a reputation for being one of the firmest believers in the strength of the market. However, in a recent interview he said that, despite continued economic growth, it was looking more and more unlikely that the real estate market would be able to pull itself out of its current malaise.

Ren, chairman of Huayuan Property Co Ltd of Beijing, has a strong market statistics base and a research team. Most of his forecasts in the past few years have proved to be accurate.

For some industry insiders that has given Ren's change of perspective extra credence, suggesting that China's real estate market, especially in smaller cities with huge supply, now faces serious problems.

"When the economy trends down, the real estate sector slackens too," Ren said. "This rule applies the world over; China is no exception. Incomes and consumption are certain to weaken in this sluggish economy."

Economic figures for August painted a gloomy picture: industrial output grew at the slowest pace since 2008 amid the global financial crisis, and fixed-assets investment, an important driver of economic activity, slowed to a 14-year low of 16.5 percent in the first eight months of the year.

Analysts with ANZ said China's GDP growth may slip to 6.5 to 7 percent in the third quarter if the September numbers remain weak.

In the same period, the country's real estate market, once regarded as an important growth engine for the world's second-largest economy, showed new signs of cooling as more cities reported month-on-month price drops.

In the 70 big Chinese cities tracked by the government, new homes in 68 had month-on-month price declines in August, compared with 64 in July, the National Bureau of Statistics said. That marked the biggest drop since January 2011, when China changed the way it compiles the data.

Average monthly real estate investment has slowed to 13.2 percent year-on-year in the first eight months of the year, from 13.7 percent in the first seven months, the bureau said. The total area of property sales and sales volume fell too.

Many analysts are concerned that the weakening real estate market, apart from being a drag on the overall economy, may be a trigger for the crisis of local government debt. However, things may not be quite as bad as that.

Most local and regional governments in China have sufficient resources to weather the impact of a property market downturn, a report by Standard & Poor's says.

"We believe most Chinese local and regional governments can tide over a 50 percent decline in property-related revenue over the next year or so," said Standard & Poor's credit analyst Liang Zhong. "We estimate that property-related revenue accounted for roughly 20 percent of their total revenue in 2013."

The report said that some of the measures the local and regional governments can take to deal with the problem are cutting non-core spending, strengthening the collection of revenue, using their sizable fiscal reserves or selling some assets. However, the benefits from these are likely to be short term.