central government's decision last week to lower the required equity ratio for residential property development will benefit cash-strapped real estate developers but its immediate impact on China's domestic home market remains unclear.

The State Council, China's Cabinet, reduced the minimum capital requirement for housing developments to 20 percent from 35 percent, the first cut since 1996 when fixed-investment curbs were imposed across a broad array of industries to reduce risk and control runaway growth.

"The lower equity ratio, introduced against the background of sluggish investment in the residential property market in the past three years, aims to boost home supply, should demand pick up after the cyclical correction," said Hingyin Lee, director of research and advisory for East China operations at Colliers International, a global real estate firm.

"The measure will relieve developers' funding constraints and lower financing costs," said Lee.

Investment in real estate across China totaled about 729 billion yuan (US$106 billion) in the first four months of this year, a year-on-year drop of 27 percent, the National Bureau of Statistics said last month.

Meanwhile, investment in housing developments, excluding those built to relocate residents under urban redevelopment projects, plunged almost a third to 511 billion yuan.

In Shanghai, investment in real estate development picked up a bit between January and April, climbing 1.8 percent from a year earlier to 41.94 billion yuan, the Shanghai Statistics Bureau said last week on its Website.

While overall sentiment showed a slight recovery, investment in housing still dropped 10 percent to 24 billion yuan, the bureau said.

"With a lower capital requirement for housing projects, the central government wants to encourage real estate developers, especially mid-size to smaller ones, to inaugurate more housing projects and raise the supply of new homes," said Kurt Jia, national director of investment at Jones Lang LaSalle Shanghai.

"Cash-strapped developers will definitely find it easier to kick off new projects. But for many large companies, there may be no immediate impetus because their time frame for decision-making is usually longer."

Indeed, caution still prevails among developers despite early signs of a possible recovery in the market.

"Without a doubt, the reduced equity ratio should have a positive impact on the country's real estate market as well as on developers," said Raymond Hu, vice general manager of Shanghai Zizhu Real Estate (Group) Ltd, which specializes in high-end residential development.

"However, it's hard to say how individual developers may be affected by the policy change because financing is only a slice of total development costs. Other elements, such as the price of land, building materials and wages, are also significant factors."

Many developers are content to remain on the sidelines until the tentative signs solidify into a firm recovery trend, industry analysts said.

In Shanghai, sales of new homes reached a 21-month high in May amid growing demand for mid to high-end residential properties.

A total of 2.1 million square meters of new houses, excluding those in urban redevelopment projects, changed hands last month, a month-on-month increase of 11 percent, according to latest statistics released by E-house (China) Holdings Ltd.

The city's property-buying momentum has been propelled by stimulus measures unveiled by the municipal and central governments. They include cuts in property-related taxes and fees and more favorable mortgage terms, the local statistics bureau said.

New property sales jumped 13.2 percent to 8.77 million square meters in Shanghai in the first four months of this year, the first year-on-year increase since December 2007. The bulk of the transactions related to home sales, which jumped 21 percent from the same period a year earlier to 8.2 million square meters, according to the bureau.

Some developers are still willing to bet that the worst is over, though their numbers have declined.

Between January and April, construction began on about 7.04 million square meters of properties in Shanghai, a drop of 13.7 percent from a year earlier.

In the same period, work on 5.11 million square meters of properties was completed, a drop of 10.6 percent, the local statistics bureau said.

Construction of new housing projects suffered the most in the period, plunging 29 percent to 4.6 million square meters. Completed work on new housing projects fell a fifth to 3.4 million square meters.

Most analysts dismiss speculation that home prices are poised to jump as easier lending makes developers less likely to offer discounts.

"Price increases, or decreases, are actually based on a lot factors," said Xue Jianxiong, an analyst with E-House. "It is somewhat still too early to say how the new policy will impact the market."

(Shanghai Daily June 5, 2009)