China's tropical getaway becomes latest property boom

does this sound familiar.been there,done that and it doesn't end well

HONG KONG (MarketWatch) -- It's home to a submarine base, a recent host for the Miss World beauty pageant, and it draws the likes of action hero Jackie Chan and legendary financier George Soros. And now China's southern island of Hainan can add another distinction -- the nation's newest hot property market.

Real-estate prices on the island, where white-sand beaches and jungle-covered mountains have earned it associations with Hawaii, have jumped by more than one-third in the last five weeks.

And in Sanya, one of the island's main resort cities, luxury condos have risen as much as 40% since the start of the year, bringing prices close to similar properties in Beijing and Shanghai.




A good part of the real-estate spike comes from Beijing's announcement in early January that the island would be developed into a major international tourism destination by 2020.

In addition to a slew of new golf courses and five-star hotels, the government may also loosen visa rules and could allow Hainan to become the first Chinese territory outside Macau to license casinos.

"A lot of developers are looking at Hainan very seriously because of the government's policy," said Margaret Ng, a senior China analyst with CB Richard Ellis in Hong Kong.

Local Communist Party head Wei Liucheng said he was taken off guard by the sudden rise, calling it an "unexpected response" to the tourism plan, according to Chinese news reports.

Provincial committee head of the Communist Party Wei Liucheng, who unveiled the new rules, said he was taken off guard by the sudden rise, calling it an "unexpected response" to the tourism plan, according to Chinese news reports.

In a bid to curb speculation, authorities suspended land sales and approvals of new building projects in January. But instead of cooling the market, many believe the suspensions incited a second wave of gains, as developers and land owners moved to hoard property in the expectation of higher prices.

"There is a bubble forming, and it is bound to burst if effective measures are not applied soon," the state-run China Daily quoted China Real Estate Association Vice Secretary He Qi as saying.

Among concerns is the number of vacant apartments -- estimated to be as high as 30% in Sanya -- raising the prospect that prices could tumble if confidence turns.

Off the charts
Ng said it was hard to get an accurate impression of the scale of the Hainan boom as there are few reliable data-tacking indexes.

Large property consulting companies tend to focus more on China's 70 largest cities, she said, but judging by anecdotal reports and her own visits to the island, the boom looks like the latest incredible chapter in China's ongoing love affair with real estate.

Research by Standard Chartered published earlier this week estimated nationwide land prices more than doubled in 2009, but that figure is likely well below the true rate of gains, the report's authors said.

For one thing, the report excluded some bizarrely inflated data. Standard Chartered's Shanghai-based head of research Steven Green said that figures showing an 880% rise in the eastern Chinese city of Wenzhou were axed from his analysis, as were "similarly crazy" data for Hainan's provincial capital Haikou.

"The level of appreciation was so high, we took them off the chart," Green said.

Even so, they found land prices in seven cities tripled -- based on their projected value when developed -- while those for a gauge of 10 cities, including Beijing and Shanghai, rose an average of 147%.


Market Edge: How Fast is China Likely to Cool?There's overheating in certain parts of the Chinese economy, such as the property sector, but that doesn't mean it can be called a bubble, according to Richard Gao, lead manager of the Matthews China Fund. Laura Mandaro reports.
China's official statistics are also indicating a heated market, though the gains look less spectacular. Property prices in 70 major cities were up 9.5% in January from a year earlier, accelerating from a 7.8% rise in December on year.

"We believe we now have a bubble in many cities, particularly the big ones," Green said.

Increasingly nervous at the scale of China's lending boom, some analysts have begun furiously filling in spread sheets to gauge the likely fallout from a property bust.

Royal Bank of Scotland recently weighed up scenarios in which the property market crashes this year, and another where it continues to rise 15% before crashing in 2011, using the scenarios to asses the impact of 16 listed property developers.

If property prices crashed by an average 40%, for instance, Guangzhou R&F Properties Co.'s (SEHK:HK:2777) (OTHER:GZUHF) current share price would be 200% above its net asset value, while Agile Property Holdings Ltd (SEHK:HK:3383) (OTHER:AGPY.Y) - among those said to have projects in Hainan - would be 193% above NAV, according to the RBS projections.

Not the apocalypse
But despite the impossibly steep climb in real-estate values in Hanian and elsewhere across China, many analysts are surprisingly calm about the possibility of a catastrophic crash.

One mitigating factor involves a prime driver of the property-price gains: the rise in bank lending.

China's state-controlled banks opened the lending floodgates last year in response to the global financial crisis, but they are now tightening back up.

After data showed 1.1 trillion yuan ($161 billion) in new loans were issued during the first two weeks of January alone, regulators ordered banks to tighten their lending. They also raised the amount of funds that banks must set aside as deposits and even issued guidance on what sectors should receive credit -- a list which did not include real estate. See full story on China's December lending

Standard Chartered's Green said that land prices in many cities are currently near levels they reached at previous peaks, suggesting government's effort to cool the market could be successful, although some pain is likely during the next two years.

In fact, there's some evidence a cooling in China's property market is already underway -- outside Hainan at least.

Transactions in Beijing and Shanghai were down 41% and 29% respectively in January from December, according to figures compiled by Chinese real-estate tracking Web site Soufun. Part of the drop, however, may have to do with buyers seeking to avoid a levy that came into effect on Jan. 1.

And while such easing may going on in the big cities, interested money seems to now be bidding up prices in other markets, such as Hainan. About 80% of property transactions on the island are from outside the province, with a major of coming from the northern China, according to CB Richard Ellis estimates.

Hanqing Gao, a journalist who moved to Hainan in 2009, says matter weren't helped by one of the coldest winters in recent history in the country's north.

"A lot of people come from the north and they stay in town for the winter, and they need to rent or buy flats," Gao said, adding that the national tourism development plan further "drummed up the market."

She compared it to the fast-growing metropolis of Shenzhen, which sprouted after the central government decreed the city bordering Hong Kong as a special economic zone.

Even George Soros has gotten involved, apparently betting on the rise of China's leisure culture though his 18.6% stake in HNA Group, the parent of Hainan Airlines (SSE:CN:900945) , the largest privately owned airline in China.

But while such speculative frenzy could point to a devastating fall, some say the current levels have enough demand to support them.

Credit Suisse Chief Regional Economist Dong Tao said that while credit conditions in China are "getting shaky," there are few signs of a colossal bust any time soon.

"Chinese individuals are not short on money -- it's a massive excess liquidity situation," Tao said.

Standard Chartered said one possible outcome is that property prices hover around current levels, even as a wave of new supply is set to come onto the market around the middle of this year.

Prices in this scenario would draw support from strong demand from owner-occupiers -- estimated at 80% to 90% on a nationwide basis -- and from the fact that purchases, for the most part, are financed with low levels of debt.

Most at risk of a margin call are the luxury properties in Shanghai and other leading cities that were ground zero for speculation.

"Bubbly prices may deflate more [in Shanghai], but not enough to damage the broader economy," Green said.