Vanke’s Empire

Real estate developer Baoneng Groups subsidiary Jushenghua has again pledged a portion of its stake in one of the nations largest developers China Vanke as loan collateral.Vanke， which successfully rebuffed a Baoneng hostile takeover bid last year， said in a May 4 filing with the Shenzhen Stock Exchange that Jushenghua had put up 91 million shares， or 0.82% of its stock， as part of a deal with Citic Trust on April 28.

The filing did not say how much money Jushenghua borrowed from Citic Trust. But the latest pledge is the fifth of its kind and raised Citics loan-related holdings of Baoneng subsidiarys Vanke stake to 182 million shares.Jushenghua had previously pledged the stock to Shenzhen-based Penghua As- set Management Co. under a loan contract that ended two days before the Citic deal.Penghua still holds as loan collateral another 343 million Vanke shares owned by Jushenghua.

In addition， Ping An Securities holds 364 million Vanke shares as Jushenghua loan collateral. In fact， according to Vanke filings with the stock exchange， Jushenghua has pledged almost all of its Vanke stock as loan collateral. Baoneng is Vankes largest shareholder， controlling 25.4% of the companys stock through subsidiaries Jushenghua and Foresea Life Insurance. Its rise to top stakeholder followed its failed and highly controversial hostile takeover bid last year.

The dispute ended in favor of a Vanke management team thanks to the Shenzhen governments intervention. The take-over battle also drew attention to how Foresea invested in equities with funds raised through sales of short-term， high-yield insurance policies that resemble wealth management products. The China Insurance Regulatory Commission recently started cracking down on firms that offered these policies， which some say are technically not insurance products， due to risk concerns. In February， it fined Foresea 800，000 yuan （$116，400） for “fabricating information” and “misusing insurance funds，”and ordered Yao Zhenhua removed from his position as company chairman.

But Yao has retained his job as chairman of Baoneng. He is also chief executive at Jushenghua. Vankes Shenzhen-listed shares have been trending lower recently， dipping to 18.83 yuan per share May 3 and closing at 19.02 yuan per share May 4. Falling share prices could make it harder for Jushenghua to pledge its Vanke holdings as loan collateral in the future. Lower share prices would also add to pressure connected to the companys use of money raised through nine asset management products – in which funds were used to buy Vanke shares on behalf of Baoneng. Relying on these products made it possible for Jushenghua to buy a combined 10.35% of Vanke shares now in Baonengs portfolio. Vanke is overdue for a board reshuffle that was scheduled for March 27. Sources close to the company said the delay was caused partly by Baonengs ambiguity over whether it planned to nominate candidates for director slots.

A Chinese local government halted home-sales permits to China Vanke Co.， as the nations leaders escalate scrutiny of irregularities in the property market to rein in surging prices. Xian city， the capital of Shaanxi province， halted applications on pre-sale permits submitted by Vanke， which is suspected of illegally selling two projects， according to astatement on the citys housing bureau. Transactions involving Vankes 12 projects in the city were also halted， the bureau said. The bureau didnt disclose what illegal activities Vanke was engaged in.

The move is the latest evidence that Chinese local governments are stepping up a campaign to cool a home-buying frenzy and to prevent a housing bubble. Chinas housing ministry in October asked local administrations to investigate“illegal” property sales by home builders， in a bid to maintain an “orderly” home market. Vankes Hong Kong-traded shares fell as much as 3.9 percent， the biggest intraday decline since March 29. The builders Shenzhen-traded shares fell 1 percent as of 1：37 p.m. Separately， Vanke said Tuesday that it canceled a 1.5 billion yuan （$218 million）bond sale， citing changes in market conditions.

Representatives at Vankes public relations department didnt immediately comment.Xians official television station reported Monday that Vanke began selling apartments in three projects before acquiring full permits. Chinese developers are required to obtain pre-sale permits before selling， as they typically sell projects under construction and book revenue at delivery. Chinas government has made controlling its frothy real estate market a top priority in 2017， and authorities in Xian have taken this war on homebuying to a new level by shutting down sales of 12 projects belonging to the countrys secondlargest developer in their city of nearly nine million people.

The housing bureau in the capital of northwestern Chinas Shaanxi province announced on its website on Monday that China Vanke is suspected of illegal sales at its Vanke City Glory （萬科城市之光） and Vanke Oriental Legend projects， both high profile multi-stage developments covering more than a city block each. The local government has responded by shutting down new sales at all of the Shenzhen-based developers 12 projects in the city， according to the statement. The lockdown of Vanke sales comes as Chinese cities take ever harsher measures to control rapidly rising housing costs， after the central government made cooling down the real estate market a top priority at its annual meetings in March of this year.

Vanke Implicated in “Illegal Pre-Sales”

Enforcement officers from the Xian housing authority are said to have carried out on-site investigations of Vanke projects in the city， resulting in sales offices being closed at government order， according to a report by official news agency Xinhua. Vanke is accused of “illegal pre-sales” of projects which had not completed all steps of the official permit process. The housing cops questioned Vankes deputy general manager for Xian， extracted computer data， and dug through company records before issuing an order to “cease illegal activity，” according to Xinhua. The official media report indicates that authorities found illegal sales at Vanke City Glory and Vanke Pearl Forest. Xinhua reported that Vanke offices at its Liyuan Mansion （梨園公馆） project had also been sealed by the police.

The official order demands that Vanke immediately stop noncompliant pre-sales， accept an official investigation， close its sales offices and make its staff available to investigating officials. The local authorities promised that violations would be severely punished under the law， without specifying potential penalties.The action against Vanke is said to be part of a citywide effort to stop illegal sales of housing in Xian， according to the Xinhua report， with authorities pledging to work nights and weekends to raid sales offices and push forward investigations.

In addition to shutting down Vankes projects， the authorities say that prominent local brokerages are under investigation for illegal sales activities， and urged the public not to sign contracts for purchases of homes at projects that had not received all required permits.Inquiries by Mingtiandi to Vanke representatives went unanswered at publication time， however， its unlikely that the second-largest seller of homes on the mainland decided that 2017 was the time to test the limits of city government authority. There is a chance， however， that the Xian government， feeling pressure to cool the housing market， has decided to give new guidance on pricing and sales launches on projects that may have been in the pipeline for three years or more.

“Developers such as Vanke dont start selling projects without first discussing with local authorities， so this is an interesting battle for someone to pick，” veteran China real estate advisor and former head of China real estate advisory and urbanisation services at PwC Sam Crispin told Mingtiandi.“Taking action against a top name homebuilder such as Vanke could be a way for the city government to send a message to everyone selling housing in the city that they need to follow some new rules，” Crispin added.

China Just Says No to High Priced Home Sales

During the past year， local governments in a number of Chinese cities have pushed developers to delay or postpone opening new projects， particularly high-end developments， as a way to avoid news of rising home prices. Developers both foreign and domestic have been asked to delay the sale of or re-price luxury homes by local government officials afraid of being seen as not doing their part to hold down the price of housing in their jurisdictions.

During February local media reports indicated that Beijing authorities had put a price cap of RMB 80，000 per square metre on the sale of new homes， although some reports indicated that this standard applied only to the central district of Chaoyang. Central government officials have since praised the leadership of Beijing municipal authorities in assuring housing affordability and cooling down home prices. Developers who spoke with Mingtiandi on condition of anonymity have reported similar measures in Shanghai， with the homebuilders being told that they should consider delaying the launch of their projects until after the current market pressures had subsided.Chinese property developers have snapped up more land this year， defying tightened government policies to curb rising home prices， as large companies prepare to diversify their offerings beyond houses， state media reported Friday.

The top 25 land-buying companies spent 494.3 billion yuan （$71.7 billion） in the first four months of this year， nearly double the amount of 254.9 billion yuan in the same period last year， according to real estate agency and research firm Centaline Group. Hong Kong-listed property giant Country Garden Holdings Co. Ltd. ranked first with a land payment of 52.7 billion yuan， followed by state-owned Poly Real Estate Group Co. Ltd. with 45.5 billion yuan， Centaline Groups data showed.

The voracious demand for land came despite moves by dozens of Chinese cities to clamp down on overheated housing prices since mid-March， most typically by raising downpayment requirements and mortgage interest rates. Some cities have also limited the number of properties each family can own， and a small number of places have banned the conversion of commercial buildings — mainly offices and shops— into homes.Facing such stiff headwinds， large real estate developers are stockpiling land as they seek to expand businesses from simply selling houses to providing services for properties they retain， according to an opinion piece carried by the state-run Securities Daily.

Many firms see great potential in commercial properties such as entertainment and leisure facilities， shopping malls， exhibition centers and logistics hubs as Chinas growth model transforms to rely more on consumption rather than investment and exports， it said. Leading Chinese developer China Vanke Co. Ltd. acquired two plots of residential land for a total of 3.6 billion yuan on April 28. The company plans to retain more than half of the land to build rental houses， nursing homes， shops， hospitals， schools， offices and other facilities that it will own and operate， as part of its strategy to be an “urban infrastructure service provider”to develop what it calls “new profit-driving engines，” the report said.

Building up reserves of land and maintaining them at a high level is also necessary for smaller companies because the government requires developers to construct infrastructure， ranging from water and natural gas supplies to road and telecommunication facilities， before they can start erecting houses on a piece of land —a process that takes years， it added.

Land sales in 300 Chinese cities soared 35% year-onyear in April to 225.6 billion yuan， the Economic Information Daily， which is run by the official Xinhua News Agency， reported Friday， citing property market data provider China Index Academy.

The area of land sold fell 15% year-on-year last month to 54.3 million square meters， but it was up 7% from March， it said.

In the first quarter of 2017， land acquired by real estate companies rose 5.7% from the same period last year， compared with a drop of 11.7% in the first three months of 2016， data from the National Bureau of Statistics showed.

China Housing Market Goes Wild

If you have been following China for any significant amount of time you will likely have observed the drastic ebbs and flows that the countrys housing market regularly endures. One day the market is on fire， with the prices of housing in some cities soaring to almost unbelievable heights， and then prices suddenly top out or even start to drop and it seems as if the bubble has finally burst— but two or so quarters later prices start climbing and the cycle begins all over again.

In 2005， some international media sources first began predicting a bubble in Chinas housing market. But by 2012 China was in the middle of a house buying craze. In 2013 the market continued to soar. 2014 was the year that The Economist declared to be the“end of the golden era” for Chinas real estate boom， as some markets seemed on the verge of imploding. But by the end of 2015 housing in China had “turned a corner” and stabilized again. By the fourth quarter of 2016 the housing markets of some major cities were hotter than ever， and some analysts again began proclaiming that the much-touted housing bubble had finally arrived， “as expected.” But now it is the midpoint of 2017， and Chinas housing markets are again in a period of stabilization， as the merry-go-round continues spinning.

It is a mistake to view Chinas housing market as something left to the whims of a market economy. The system is rigged. Central， provincial， and municipal levels of government have their hands on a powerful deck of levers， which they can move up or down depending on the direction they want their respective housing markets to move in. They control supply and have a very strong influence on demand. When the market gets too hot they cool it off with policies to make home-buying unfavorable or even outright restricted； when the market gets too cool they lessen their restrictions and open up the floodgates of pent-up homebuyers. A graph of the year-on-year price change of Chinas housing market since 2011 is a perfect sine wave — obediently rising and falling in direct accordance with government policy.Many cities across China are now down shifting into a lower gear， as end-2016 saw overall home prices jump 11% year-on-year， with cities like Shanghai and Xiamen achieving gaudy annual price hikes of 31.2% and 43.8%， respectively. It was apparently time to cool things off again.

Think of Home Purchasing Restrictions （HPRs） as the brakes of a truck rolling downhill. They are a way to halt the runaway momentum of the housing market by manipulating the buyer side via making home purchasing more restrictive and less financially attractive. Then when the housing market equalizes or gets a little cooler than the overall economy wishes to bear， the brakes are let up on， HPRs are eased， and buying new homes become more appealing once again， as the real estate market regains momentum.

Restricting how many houses people can buy

It may sound too simple， but when Chinas housing market gets too hot in certain cities one of the tools that the government has at its disposal is to restrict how many homes buyers can obtain. Typically， there are different standards for locals（those who are registered to live in a place or have paid taxes and social security there for X amount of years） and non-locals. Suzhou， for example， recently unleashed a policy where locals who already own three homes are not permitted to buy any more， while non-locals can only own one property in the city. This move is to inhibit speculation in the market and to stem the common practice of storing （or concealing） wealth in real estate， which has contributed towards extremely high home prices in the recent past.

Another way of encouraging or discouraging activity in the housing market is by regulating how much of a down payment homebuyers must make before financing becomes available. Depending on how the local market is performing in any given city， mandatory down payments can range from 20% to 35% for first-home buyers all the way up to 60% to 80% for secondhome buyers. For buyers who wish to own three or more homes， they often need to pay the full amount up front.

As China doesnt have yearly property taxes， the government takes their cut at the time when homes are sold -- and the amount that they levy can be huge. Were talking value-added real estate tax， land value-added tax， real estate transaction tax，property tax， property transfer tax， education tax， etc . . . Like so， government agencies can raise and lower property taxes as another way to encourage or discourage prospective homebuyers， depending on the way the winds are blowing. For example， at the beginning of last year Chinas Ministry of Finance cut deed and business taxes for home purchasesin an attempt to stimulate a sluggish housing market； while by the end of the year， when the market was considerably hotter， cities like Suzhou were slapping on an additional 20% capital gains tax on second home purchases.

Beyond instituting policies and tax rates that impact prices in the housing market， municipalities can administer decrees which can more or less cap the cost of homes. For example， Dalian sought to remedy housing prices that were rising disproportionately above average income levels— a major problem in many Chinese cities— with controls which require the average y-o-y price growth of new residential properties to be less than the citys residents average rise in per capita disposable income.