CHINA’S AUSTERITY measures have resulted in its property prices falling by over 30% over the past 8 months, but Pan Hong’s founder and executive chairman, Dr Wong Lam Ping, was in Singapore recently to convince investors there is no bubble in the second tier cities.

Curbs on property speculation in China are stiffer than in Hong Kong or Singapore, says Dr Wong, refuting concerns on China’s property bubble.

Property sales in China rose 42.1% year-on-year to 937.13 million sq m in 2009 while transaction values rose 75.5% to Rmb 4.4 trillion, according to the National Bureau of Statistics.

To cool the property market, the Chinese government has reintroduced sales tax on residences resold within 5 years of purchase, and a 40% down payment on the purchase of a second residential property to curb investment and speculative inflation.

In a more recent development, the Bank of China will be raising lending rates for property development loans, with interest rates higher than the benchmark rates from 1 Feb.

There has also been tightening of bank loan amounts on property developments, and signs of rising mortgage rates for first homeowners.

Data from China Int’l Capital report dated 2 Mar 2010

However, Dr Wong says that property demand in second tier cities, where Pan Hong’s developments are located, is expected to remain stable despite credit tightening for several reasons:

Firstly, demand for residential properties in second tier cities primarily driven by owner-occupiers including upgraders.  Speculative demand, which the policies aimed to curb, is lower there.

Residential properties there are still affordable.

Secondly, with half of China’ s population estimated to be rural, second tier cities are still urbanizing rapidly and its citizens are experiencing a rising disposable income.

Continuing urbanization and the development of inter-city railway raise the potential of future property price increases.

Pan Hong’s land bank in Jiangxi and Zhejiang are next to first tier cities, i.e. Shanghai and in Guangdong.

Pan Hong is a landbanking play that leverages on the spillover effect of the soaring property prices in Shanghai and Guangdong on surrounding second tier cities.

Since listing on the Singapore Exchange in Sep 2006, its landbank has multiplied more than sixfold.

Headquartered in Hong Kong, it has substantial undeveloped land reserves in second to third tier Chinese cities.

Total site area the group controls amounts to about 2.5 million square meters, which it intends to develop into 8 residential estates with an estimated gross floor area of 4 million sq m.

Their landbank is located in Jiangxi (adjacent to Guangdong) and Zhejiang (adjacent to Shanghai), average cost of its land parcels works out to a mere Rmb 396 per sq m, compared to Rmb 16,685 in Shanghai and Rmb 3,726 nationwide for residential real estate.

Dr Wong explained that the low cost was due to Pan Hong having been developing property in China for over 20 years and having accumulated its land bank some years back.

That’s why it has relatively low gross gearing (16.4% as at 31 Dec) among listed property developers and is in a net cash position.

Pan Hong’s strong cash position enabled it to opt against selling properties at dismal prices during Oct 2008 to Mar 2009, when the global financial crisis was at its trough.

The company sustained losses during that 6-month hibernation period, but China’s property market recovered with a vengeance in 2009, and for the 9 months to 31 Dec 2009 subsequently surged 386.9% year-on-year to reach Rmb 123.4 million.

It has a strong track record – it won numerous awards for two flagship developments – Nanchang Honggu Kaixuan in Jiangxi and Hua Cui Ting Yuan in Huzhou.

The group’s strategy is to seek strategic land parcels along the affluent Yangtze River Delta at low cost through acquisitions or joint ventures, targeting second or third tier cities.

Some of these cities it has a foothold in are Nanchang (Jiangxi), Huzhou and Hangzhou (Zhejiang).

About 502,000 sq m of gross floor area is in the pipeline for delivery over the next two years.

Pan Hong’s landbanking strategy has caught the eye of the BOCOM.  The investment banking arm of Bank of Communications took a 4.86% stake in Pan Hong last Aug via a placement of 489.6 million shares at 50 cents per share.

At 61 cents (Fri close price), Pan Hong is still trading at a 44% discount to its readjusted NAV of S$1.09.