Speculators Go Online Chasing Profits as Home Prices Drop

By Bloomberg News  

Photographer: Tomohiro Ohsumi/Bloomberg

A couple looks at residential buildings from the Bund area of Shanghai, China. To stem... Read More

With just 11,000 yuan ($1,796), 50-year-old Deng Bangfu made his first property investment in China, flipping it in just two months for a profit even as the nation’s home prices fall.
Deng and about 300 other investors bought a 14.9 million yuan townhouse in June in the southern Chinese city of Dongguan and sold it in August for 16 million yuan. The vehicle: a peer-to-peer lending and financing website called Tuandai, which is testing a crowdfunding product that meets developers’ desire to quicken sales by tapping demand for better returns.
“Now I can tell people I once owned a townhouse, which I could never afford myself all my life,” Deng, an accountant at a technology company in
Dongguan, said by phone. “We know that local governments have started loosening home-purchase restrictions. As soon as banks ease mortgage curbs, home prices will quickly rebound.”
Online investors, who since 2011 helped drive a 50-fold increase in financing through peer-to-peer websites such as Tuandai, are turning to property as falling home prices prompt the government to ease curbs aimed at stamping out speculation. Officials are seeking to revive local-government revenues at the risk of bringing home-flippers back to the market.
Speculators could return, Fitch Ratings said in an Aug. 7 report.
“If liquidity recovers, home prices start to go up and sentiment improves,” Andy Chang, Fitch’s Hong Kong-based property analyst, said by phone. “Peer-to-peer lending will surely play a stronger role pushing the waves because it’s pure speculation or investment demand.”

Rife Speculation

Speculative buying -- selling assets in a short period of time -- accounts for more than 20 percent of demand in first-tier cities, which include Beijing and Shanghai, JPMorgan Chase & Co. analyst Ryan Li wrote in a report last month.
Investors accounted for 40 percent of homebuyers in 2007, when Shenzhen World Union Properties Consultancy Inc. started asking clients their reason for buying. That was three years before former Premier Wen Jiabao imposed home-purchase curbs and raised down payments to prevent a housing bubble.
Home sales plunged 10.5 percent in the first seven months from a year earlier amid tight credit, according to government data, reversing a 27 percent jump last year. New-home prices fell in 64 of the 70 cities tracked by the government in July from June, the most since January 2011.
To stem the downturn, 37 of the 46 Chinese cities that imposed limits on home ownership since 2010 to snuff out property flippers have relaxed or scrapped restrictions on the number of apartments one can buy as of Sept. 3. The nation’s biggest lenders cut interest rates on first mortgages in Beijing and Shanghai.

With ‘Vengeance’

“When the market recovers, local governments change their tune and the media is again saying things like ‘the property industry is overall healthy,’” said Xu Hongwei, founder and chief executive officer of wangdaizhijia.com, which tracks more than 1,000 peer-to-peer loan websites. “I won’t exclude the possibility that these investors would say ‘OK, property is fine now.’”
A removal of home-purchase restrictions may prompt home prices to “rebound with a vengeance,” SouFun Holdings Ltd., owner of the nation’s biggest real estate website, said in an August report after an online survey of 599 people. Almost 80 percent of the respondents said such curbs in Shanghai had hindered their purchase plans, with 42 percent expecting the city to relax the limits later this year.

‘Irrational’ Investments

The risks of online property speculation are “very high” because anybody with 1,000 or 2,000 yuan can take part and many of them may not understand investing, Standard & Poor’s Hong Kong-based analyst Fu Bei said.
“Such investments are irrational, and they won’t become a trend” because it’s short-term speculation not supported by prices in a market downturn, said Zhang Haiqing, Shanghai-based research director at Centaline Group. “This is all fairly crazy.”
Fu said prices will keep falling because of the supply of unsold apartments. The inventory of unsold new homes in 20 large cities jumped to an average of more than 23 months of sales in June, according to Shenzhen World Union data compiled by Bloomberg News.

Seeking Returns

Bricks and mortar have historically offered better returns in China. The average home price, excluding government subsidized housing, jumped almost 180 percent from 2000 through 2012, according to official data. The benchmark Shanghai Composite Index (SHCOMP) gained less than 10 percent in the period.
“There aren’t that many investment channels with satisfactory performance in China,” said Fitch’s Chang. “If you look around, property remains relatively good among industries.”
That’s what the Dongguan online investors, so far free of any government oversight, are betting on. Tuandai attracted 288 of them, including Deng, to take part in the purchase of the 656-square-meter (7,060-square-foot) townhouse on June 17. The order book was filled in 21 hours.

‘Home Baby’

Two weeks later, 517 investors pooled 18 million yuan online in nine hours to snap up a second fangbaobao, or “home baby,” as the products are known in Chinese. This time it was a 705-square-meter townhouse in the same Citic Real Estate Co. project in Dongguan, about an hour drive from Shenzhen.
Tuandai negotiated to pay 25 percent below the market price for Deng’s townhouse and got similar discounts for another 17 Citic homes. A buyer agreed to pay 16 million yuan for the first property and the transaction was completed Aug. 23, according to the Tuandai website. That handed Deng and his fellow investors an annualized return of 40 percent, more than 13 times the benchmark one-year deposit rate, according to the website.
Dongguan eased property policies on Aug. 10, expanding tax favors and scrapping price controls, according to a statement on the city government’s website.
About 60 percent of investors lending through peer-to-peer websites had annual income of less than 100,000 yuan, 85 percent of them male, and 80 percent of them were between 20 and 40 years old, according to data provided by wangdaizhijia.com.

P2P Boom

Peer-to-peer lending has taken off in China since 2011 as traditional methods of private lending among family and acquaintances, part of the country’s unregulated $6 trillion shadow-banking system, move online. The little-supervised platforms pool money from small investors with as little as 50 yuan to finance anything from wedding preparations, personal medical expenses to car purchases.
The total outstanding amount of investments rose 11 percent from July to 58.1 billion yuan as of Aug. 31, compared to 1.2 billion yuan at the end of 2011, according to wangdaizhijia.com.
Sites such as Tuandai are able to negotiate large discounts as developers in China’s crowded homebuilder market are eager to revive slumping sales. Tuandai had 2 billion yuan of transactions in the year to Aug. 28, more than 11,000 investors and a lending rate averaging 16.45 percent, according to wangdaizhijia.com.
Tuandai charges its ordinary members a 0.3 percent fee on withdrawals from online accounts, and collects commissions of 2 percent to 4 percent on loans from borrowers. Investors in the “home baby” offerings are so far exempt from any charges as the website is testing the product. Anyone can invest after registering online and transferring a minimum 50 yuan into their Tuandai account.

Turned Away

More than 10 smaller developers have approached Tuandai for help to sell homes, according to Chief Executive Officer Tang Jun. “Many developers came to me,” Tang, 27, said in an Aug. 5 interview. “I turned them all down because we don’t have that much time and energy now, and we don’t want them to rely on us to sell entire projects.”
Average prices at the Citic development fell to 35,000 yuan a square meter in June, from 40,000 yuan in October 2010, according to information on Sohu.com Inc.’s real estate portal.

12 Minutes

“Some developers are pushing out some of their products at low prices because homes are not selling well, and some crowdfunding websites are just seeing the business opportunity,” said Dai Fang, a Shanghai-based analyst at Zheshang Securities Co. “The key question is: what if they can’t sell it?”
More than 300 investors snapped up a third “home baby” -- a 15.1 million yuan Citic townhouse -- within just 12 minutes on Aug. 27, according to Tuandai. Two days earlier, investors voted to sell the second property for 18.9 million yuan to a buyer, who runs a local advertising firm, rendering an annualized return of at least 20 percent if the transaction is completed by Oct. 2.
“For the long run, home prices will rise,” said Deng, who plowed 55,000 yuan into the third townhouse, five times his first investment and almost double the one he made in the second Tuandai offering. “Even if we can’t sell it in the market, the property will still be there.”