Mainland social housing a great opportunity
Updated: 2010-10-01 07:50
By Patrick Ho(HK Edition)
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With its plan to construct 15.2 million social housing units between 2010 and 2012, the Central Government is making a quantum leap. Not only in its own record of providing shelter to low- to middle-income families, but also in the total housing supply on the mainland.
While the plan has obvious social benefits to a country where prices of private homes have ballooned in recent years, it also presents significant opportunities for investors with a long-term view.
The plan is the country's most-aggressive ever. Even if only half of the target is achieved, it will still add more than 20 percent to the mainland's new housing supply for the next three years. The social housing boom, therefore, will no doubt be a boon to various sectors - from cement, construction and machinery, to automotive, consumer goods and retail.
Before 1978, most homes were owned by the state and allocated to workers. In later years, the Central Government encouraged private housing development, which soon eclipsed social-housing investment. In 2009, social housing accounted for less than 5 percent of total real estate investment, while private property investment totaled 3.6 trillion yuan.
Pressure on the government to make good on its social-housing promise built up last year, when house prices skyrocketed and highlighted social tensions. Currently, it takes the equivalent of nine years of an average household's income to buy a 90 square meter flat; more than 12 years in cities like Beijing. The plan announced this year suggests that social housing this time will be different. Politically, the Central Government has shown commitment by signing accountability agreements with local governments, and holding their senior officials responsible if the targets are not met. Financially, it has beefed up funding arrangements, including the potential introduction of real-estate investment trusts.
Who stands to benefit?
China's social housing falls under three categories: economic (selling to low- to mid-income households), low-rent (letting to low-income households), and slum-area redevelopment. Social housing construction could mean big business for many mainland companies and big opportunities for investors.
Cement producers are big winners from this. While government tightening of the overheated private housing market could dampen cement demand, social-housing construction should support the sector's overall growth. State efforts to prioritize energy-efficient production and control overcapacity could also enhance the utilization rates and operating margins of cement producers. Because the pressure for social housing is stronger in top-tier cities like Beijing and Shanghai, cement producers from north and south China are better positioned for growth.
Producers of construction machinery, particularly excavators and wheel loaders, will have a similar story to tell: with most infrastructure projects already underway, social housing could become their next source of growth. Construction companies also stand to gain. Although social housing projects have a net margin of 3-6 percent - very low compared with the 15 percent demanded by residential property developers - they also carry a much lower project risk for constructors because of government funding and support, as well as virtually guaranteed sales given the discounted selling prices.
As more-affordable housing frees up disposable incomes, sales of furniture and household goods, particularly home appliances, could grow. The mainland has extended its home appliance trade-in program (which covers televisions, refrigerators, washing machines, air conditioners and computers) until end-2011 and expanded it to a total of 28 provinces and cities. Department stores will also benefit indirectly, not only from an increase in household consumption power, but also from favorable city planning and urbanization, which could increase foot traffic in department stores and thus boost their turnover and profitability.
Rising home ownership could spur auto sales, which are historically correlated to property sales - not surprising because a car is often the next big-ticket item people buy after a new home. While the auto sector took a dent after the government launched austerity measures in April, sales rebounded in August as a result of pent-up demand.
Among banks, market leaders in rural areas should benefit the most. Based on government data, around half of China's affordable housing would be located in the less densely populated provinces. Banks should benefit directly from financing demand in these provinces, and indirectly from a potential increase in investable assets post home-ownership and, ultimately, in demand for wealth management services.
The author is head of Equity Research Asia Pacific at UBS Wealth Management Research.
(HK Edition 10/01/2010 page2)