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(Corrects May property investment growth to 7.3 pct from 7.2 pct in fourth paragraph and bullet)
* May Property investment +7.3 pct y/y (vs +9.6 pct in April)
* New construction starts +5.2 pct y/y (vs +10.1 pct in April)
* Sales by floor area +10.2 pct y/y (vs +7.7 pct in April)
* Govt curbs on more cities saw demand further spills over to smaller cities
* But smaller cities' property boom peaking, unlikely to last-Analyst
By Yawen Chen and Kevin Yao
BEIJING, June 14 (Reuters) - Annual growth in China's real estate investment slowed in May, the first fall-off in three months, as government curbs cooled an overheated market and undermined investment, taking a toll on new developments.
Worries over the potential bursting of price bubbles in China's biggest cities have led to a flurry of government cooling measures in recent months as buyer demand appeared to be more resilient than expected.
The growth rate of new construction starts measured by floor area, a telling indicator of developer confidence and correspondingly volatile, almost halved to 5.2 percent in May from April's 10.1 percent on a yearly basis, suggesting a sharp slowdown in the commencement of new projects, a Reuters calculation showed.
Meanwhile growth in property investment, which mainly focuses on residential real estate but also includes commercial and office space, eased to 7.3 percent in May from a year earlier, versus 9.6 percent in April, Reuters calculated from the National Bureau of Statistics' data.
Investors, banned from the hottest markets, are increasingly looking inland, driving up prices in more remote, smaller cities with fewer buying restrictions, leading to a surprise pick-up in May sales.
The area of property sold grew 10.2 percent in May, compared with a 7.7 percent increase in April, reflecting a quickening in destocking of existing homes in smaller cities, a Reuters' calculation showed.
Inventory floor area in the first five months dropped at a quicker pace of 8.5 percent, compared to a fall of 7.2 percent in the January-to-April period.
"It's been very obvious in the past two months that the buying demand has spilled over to the third- and fourth-tier cities," said Joe Zhou, head of research for China at real-estate agent Jones Lang Lasalle (JLL).
But such forces are unlikely to offset the fast-cooling market in bigger cities in the longer term, as regulators continued to intensify the crackdown on speculators with more measures to close loopholes.
Sales in the top tier cities have dropped about 50 percent from the same period a year ago, property analysts say.
In May, China issued draft new rules for property sales and leasing, requiring developers to promptly publish accurate price information for new homes on sale, barring them from charging various additional fees, hoarding unsold homes or spreading false information about rising prices.
Some cities have also announced more stringent measures such as introducing price caps on new units and setting a holding period before reselling a property is permitted.
Analysts say developers remain cautious about growth potential in those smaller cities and are still focusing largely on bigger cities as their core revenue driver.
"This kind of spill-over demand is at its peak, and probably will only last for one or two quarters," JLL's Zhou said.
"Developers were too optimistic about third- and fourth-tier cities a few years back, and they wouldn't increase new starts there even if sales are a bit better now."
Developers continue to be squeezed as authorities tightened controls on their funding channels. Bankers and developers told Reuters in May that China's National Development and Reform Commission (NDRC), which approves corporate debt issuance, has virtually stopped granting new quotas for offshore bond sales this quarter.
Chinese home-buyers also face rising borrowing costs. Media have reported that some banks in major Chinese cities have raised their mortgage rates.
Nonetheless, chances that property prices would fall across the board in the future are slim because housing supply remains short in the big cities, a top state think-tank said on May 15. (Reporting by Yawen Chen and Kevin Yao; Editing by Eric Meijer)