Luxury Properties

Trouble in China's Paradise


Until recently, real estate buyers in Sanya, on China’s Hainan Island, carted around suitcases of cash so they could pounce on vacation apartments when they went on the market. “We didn’t even have time for toilet breaks because there were just too many clients,” recalls Zhu Lei, a property agent for the Serenity Coast luxury residential and hotel complex in Sanya. No more. Sales in the second-biggest city on the South China Sea island are “bleak,” Zhu says.

A two-year lending binge and a government campaign to transform Hainan, a tropical island in the South China Sea, into an international tourist destination like Hawaii, fueled a 48 percent surge in Sanya’s home prices in 2010, according to government data, making it China’s best-performing property market. Then in 2011, President Hu Jintao’s government grew anxious about runaway housing speculation. To cool things off, Beijing authorities increased minimum down payments for home purchases and raised bank reserve requirements.

The impact has been swift: In November, average residential property prices in Sanya were 28 percent below their record high of 2,979 yuan ($473) per square foot reached in December 2010, according to Centaline Property Agency, China’s biggest real estate brokerage. Sales fell 52 percent in October from last year, to 393,450 square feet. Zhu, the realtor, sells high-end apartments in eight buildings with ocean or golf course views in the Serenity Coast complex, which is still under construction and will include five-star hotels, a music hall, and a water park. He says only about 70 units were sold during China’s weeklong October holiday, which was not near the level of 2010. A three-bedroom apartment in the luxury development sells for about 4,560 yuan per square foot on average, while a penthouse could cost as much as 13.8 million yuan. The Serenity Marina will be the host port and race village for the Volvo Ocean Race in February.

The Chinese government unveiled its plan to transform Hainan into a magnet for international tourists in December 2009. Today, hotel chains such as Starwood Hotels & Resorts Worldwide (HOT) and Marriott International (MAR) line up along Yalong Bay, to Sanya’s east. Hainan has hosted the Boao Forum for Asia, a gathering of government and business leaders modeled on the World Economic Forum in Davos, Switzerland. It also is home to Hainan Airlines, backed by billionaire George Soros.

About 58 percent of Sanya’s revenue came from real estate taxes in 2010. “Some areas in China are oversupplied in real estate, and the correction will be pretty big,” says Huang Yiping, a Hong Kong-based economist for Barclays Capital Research. He forecast China’s nationwide home prices will fall by 10 percent to 30 percent this year.

Agile Property Holdings, a developer in which has a 4.75 percent stake, has its biggest development project in Sanya. Clearwater Bay is a 20 billion yuan investment including residential apartments, villas, five-star hotels, a yacht club, shopping mall, and golf course. The project, which accounted for 31 percent of the developer’s total sales last year, is expected by the company to account for about 20 percent this year as sales slow. Still, the developer hasn’t “really cut prices” at the Hainan project, according to Alex Liu, a company vice-president. He said demand for holiday homes will remain strong as the country’s middle class grows.

Hainan has been through housing market upheavals before. In 1995, as Beijing tightened monetary policy and prodded banks into canceling loans, some developers went bankrupt, leaving unfinished real estate projects and a decade-long subdued market in Hainan. Chen Zheng, a Sanya property agent who remembers the 1990s bubble, says the government’s incentives to boost tourism and the country’s increasing wealth will help Sanya’s prices avoid an all-out crash. “I don’t think today is like 20 years ago, when there was just nothing to sustain the market but speculation,” he says. Even so, the “boom has gone forever.”

The bottom line: A real estate correction on resort island Hainan may be the start of a 10 percent to 30 percent decline in Chinese home prices in 2012.


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Companies Mentioned

  • HOT
    (Starwood Hotels & Resorts Worldwide Inc)
    • $78.65 USD
    • -0.11
    • -0.14%
  • MAR
    (Marriott International Inc/DE)
    • $64.72 USD
    • -0.97
    • -1.5%
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