Beijing luxury property slides 77.83% in Q1

Some highly geared developers presented worsening financial conditions with others forced to issue debt notes.

Collier’s International reported that the cumulative sales volume of luxury residential from January 2012 to February 2012 totaled 35,000 sqm, down 77.83% y-o-y. The overall average capital value of the luxury residential property edged down by 2.58% q-o-q by end-1Q12 despite the leasing market being upbeat, with both occupancy rate and average rent ascending.

Here’s from Collier’s:

Supply:

Total stock of luxury residential property market expanded to 75,708 units, up 4.71% q-o-q or 13.84% y-o-y by the end of this quarter. By category, the stock of luxury apartment and villa increased by 6.34% and 2.76% q-o-q to 49,179 units and 17,779 units, respectively. New villa projects that entered the market this quarter included Poly Villas and Longfor-Chinati in the Changping Villa and Chaobai River submarkets, respectively, while luxury apartment projects included Shanshui Garden, Tunsanli and Ocean Great Harmony III in the CBD, Chaowai and Asian Games village submarkets, respectively. There were no new completions in the serviced apartment sector. In relation to the pre-sale market, Royal Court and Flower and Life in the Asian Games Village and CBD submarkets were the newly launched projects during the quarter.

Demand:

Leasing demand was strong in 1Q12, driven by the expansion needs of MNCs and seasonal tenant returns. With the overall vacancy rate dropping to 19.91% by the end of the quarter, those of the luxury apartment, serviced apartment and villa sectors declined by 0.42, 1.18 and 0.99 percentage points to 19.85%, 7.88% and 25.97%, respectively. The overall net absorption amounted to 3,169 units by the end of this quarter, with the absorption of 2,541, 104 and 525 units in the luxury apartment, serviced apartment and villa sectors, respectively.

Rents:

The overall average rent of the Beijing’s luxury residential market increased to RMB172.69 psm per month by end-1Q12, up 6.18% q-o-q. By category, the rent of Beijing’s luxury apartment, serviced apartment and villa sectors climbed to RMB164.52 psm per month, RMB143.75 psm per month and RMB107.76 psm per month, increase of 6.4%, 7.3% and 1.9% q-o-q, respectively. In particular, Fraser Residence Beijing and The Sandalwood-Beijing Marriot Executive, which are located in the CBD submarket, both logged a rise of over 10% q-o-q due to the shrinking vacancy space

Investments:

The overall residential property investment market continued to be dampened by the ongoing housing policies, with investment sentiment weakening and sales in both the ordinary and luxury property sectors stagnating throughout the first quarter of 2012. In addition, some highly geared developers presented worsening financial conditions. As a consequence, there was no sales transaction that developers purchased projects under construction to yield returns based on value add services during the quarter. Interestingly, some developers expanded their financing channels through the issuing of debt notes in a bid to fulfill their long-term development and expansion plans in China. For example, China State Construction Engineering Company and Shui On Land both issued debt notes during 1Q12, totalling RMB3 billion and approximately RMB2.53 billion (USD400 million), respectively. In relation to the strata title sales market, average sales price of luxury residential lowered slightly this quarter, by a margin of 2.68% q-o-q, to RMB41,310 psm. It should be noted that the price drop was only observed in several projects, which included Sequoia International Apartment in the Zhongguancun submarket and the Galaxy Bay in the Lufthansa & Chaoyang Park submarket. The price drop was over 10% and 2.8%, respectively. Notwithstanding this, the overall average sales price adjustment remained single-digit across the board.

Outlook:

The construction speed of new luxury residential projects in Beijing decelerated in the first quarter of 2012 and should continue for the reminder of the year. According to the Beijing Land Reserve Centre, the total amount of land transacted for residential development decreased to 218,878 sqm during the first quarter of 2012, down 91.8% q-o-q. There was no record of land buyout for the usage of luxury residential developments in particular. Given the ongoing tightened monetary and housing policies, it is obvious that the residential property market in China is facing worsening operating environment, especially for those highly-geared developers. Consolidation in the residential property market, at both the state and local levels, is expected for 2012.

Demand for investing in the residential property market should continue to be pent up, with price correction still being a main priority. The robust leasing market and the rather healthy rental growth, in conjunction with undergoing price adjustment, are expected to continue to increase investment yields. With this being said, the period over the next six months remains a good time for qualified investors to buy.