In a report over the weekend global professional services and investment management firm JLL issued the following note in response to recent moves in the Chinese real estate sector.
Policymakers in China recently announced plans to loosen rules on foreign investment in the real estate sector. These rules have been subject to occasional change over the past fifteen years, in line with the sector's fluctuating fortunes.
China's housing market started to take off after the housing markets for foreigners and locals were merged in 2001. Foreign investors anticipated substantial price and currency gains and became increasingly active buying properties in China, particularly high-end units in Tier 1 cities.
This process combined with the gradual release of pent-up domestic housing demand to stoke a surge in home prices. To tame the soaring market, government rolled out a stream of tightening measures, including rules passed in 2006 to restrict foreign investment and make room for local housing needs.
Over the ensuing decade, China's housing market has gone through its ups and downs. At present, the fundamentals of the market are quite different from ten years ago. Despite a strong recovery in demand in 2015, many cities are still facing high inventories and downward pressure on housing prices. This is a good window of opportunity for the government to loosen restrictions on foreign investment.
JLL expect the loosening on foreign investment restrictions to have a minimal impact on the property market.
First, China's housing market is now mainly driven by owner-occupiers rather than investors and speculators.
Second, given that inventories are still high, it is unlikely that purchases by foreigners will be able to make any meaningful change to the market fundamentals and thus affect housing prices.
Third, investment in China's housing market is less compelling than it was before. Ten years ago, it was attractive to foreign investors because both housing prices and currency were seen as having room for further growth. Over the last decade, housing prices have risen steeply and are now seen as providing less room for further increase. In addition, foreign investors no longer view the Chinese currency as being on a one-way path to appreciation.
Furthermore, this easing policy is aligned with the broader structural reform China is pushing forward towards a more market driven economy. It is time to phase out administrative policies and let the market move more freely.
Over the past two to three years, Chinese investors have become increasingly active purchasing homes overseas, which contributed to a run-up in prices in some global cities. For this reason, some countries introduced measures to curb this type of investment demand. However, these countries mostly took a different approach from China, adopting market-oriented measures such as additional taxes for foreign investors.
The loosening in foreign investment restrictions in China this time is just like what happened recently with the RMB exchange rate. It was part of on-going structural reform.
