A real estate boom in Shenzhen? Yes, but!

The real estate market halved 

While the market for office properties, is going through a difficult period, sales in residential real estate are increasing. Prices in March 2020 showed a strong increase of 1.6%, compared to February. Transaction volume also increased by 3.8 times reaching 8008 units in March — the highest in the last two years.

Business loans changing market directions

Industry experts are concerned that this increase may be fuelled by corporate lending. Several articles, including in the Youth Daily and on the Xinhua website, report that Shenzhen’s banking authorities announced on April 22nd, 2020 that loans granted to businesses are being diverted to the real estate market, as part of their governmental support resulting from the Covid-19 crisis. In fact, governmental measures taken to help companies in the midst of the epidemic give out commercial loans at lower rates (around 4%) than residential real estate rates. Furthermore, these governmental loans also allow buyers to see a 50% decrease in their interest rates with an upper limit of one million yuan (around 80,000 euros). As an example, for a three million RMB loan, the buyer benefits from a reduction in interest from RMB16,000 to RMB11,000 for his monthly payment. Some buyers, who did not have their own company, used shells or middlemen, who provide them with a company in their name for 3,000 to 5,000 yuan. Even speculators got into the game.

A moderate impact?

Government agencies have not quantified the extent of these maneuvers. Articles judge that loans to companies illegally directed towards the real estate sector do not affect the majority of real estate transactions. Analysts believe that this unorthodox use is only one of the reasons for the market’s rise. Indeed, the city of Shenzhen acted too late to prevent Yin Yang* contracts that allowed for lower taxes and overvaluation of properties to obtain larger loans. These practices increased the volume of transactions.

While this increase is very real in these uncertain times, it is partly due to the redirection of loans to businesses and the lack of rigour of the control authorities in the sale process.

* On a sales contract, a lower sale price is officially declared. The tax department calculates taxes based on this official price. This way, the buyer who usually pays the taxes for the seller, makes some savings. On another contract, the real price is written down. This document will remain in the hands of the buyer, the seller and the real estate agent.  

This practice is widespread in many sectors. The authorities let it happen by “opening one eye and closing the other, 睁一只眼, 闭一只眼”.

This type of contract was used as a pretext to bring Chinese star Fan Bingbing under control.

Articles on the subject:

深圳楼市暴涨是不是经营贷惹的祸 in the Youth Daily 青年报

经营贷违规流入楼市惠企好政策为何肥了投机者 on Xinhua’s website 新华网

2 May 2020

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