SHENZHEN/BEIJING (Reuters) - Taoyuan Village, the first affordable-housing project in the southern boomtown of Shenzhen, should be a shining example of Beijing’s ambitious $600 billion plan to offer high-quality housing for the millions of Chinese priced out by the urban property boom.
But the residents of this new town, with its gleaming high-rises and clean lanes, have a different view.
“Almost all interior walls in every home here have turned black because the developer used bad construction materials,” complained one woman in her 50s, as she fed her grandchild outside the building entrance.
“No one helps us. They kicked us around like a ball every time we asked for help,” the woman’s neighbor added.
Both declined to give their names.
Many economists see China’s massive investment in affordable housing as one of the pillars supporting a collection of more than 50 industries, from steel to consumer electronics.
The huge quantities of building materials that must be bought and the boost to consumer confidence that a high-quality, low-cost property could bring will bolster the economy, they say.
The project is running into trouble, however.
Property companies contracted to do the building, including Vanke (000002.SZ), complain about thinner-than-expected profit margins and the building program is falling behind schedule.
More worrisome, allegations of cronyism and shoddy construction are starting to mar the project.
Beijing has said it will build 36 million homes over the next five years, estimated to cost over 4 trillion yuan ($619 billion), for low- and middle-income families.
This year, the plan is to start constructing 10 million units, almost double the 2010 target of 5.8 million units, at a cost of about 1.3 trillion yuan.
Any failure to hit those targets will amplify existing worries about a hard landing in China when U.S. growth is weakening and other big economies are facing a fiscal deadlock.
“Should the threat of a hard landing emerge, we would expect fiscal stimulus to come to the rescue, instead of monetary easing,” said Dong Tao, an economist at Credit Suisse in Hong Kong.
“Providing funding to policy housing and speeding up infrastructure projects would be the easy options.”
The next quarter will help decide whether China can really accomplish its target.
In the first part of this year, construction fell behind plan due to a funding shortage and bureaucratic delays, meaning that the builders must break ground on an average of 1.1 million affordable homes each month between June and November.
The central government appears determined to make sure funding is adequate.
The country’s top economic planner has promised quick approvals for local government financing vehicles to issue bonds to fund affordable housing.
The Ministry of Finance has also announced it would issue 50.4 billion yuan of bonds on behalf of 11 local governments in two tranches later this month and early next month, partly to help finance the home scheme. Later this year, 150 billion yuan more will come onto the market.
“These all show the government’s determination to solve problems once they arise,” said Cai Suisheng, an adviser to the housing ministry and president of Guangdong Real Estate Association.
Not everyone is convinced.
“The extent of activity that we’ll see in the second half of this year and next year is still unknown,” said Stephen Green, China economist with Standard Chartered in Hong Kong.
“The biggest problem is still financing.”
Analysts also suspect that local governments and builders, which are required to fund 90 percent of the cost, are neither willing nor able to fully commit their part.
With the real estate market cooling down under heavy government tightening measures, local governments are now suffering sharp declines in their land sale revenues, their lifeline funding source.
In addition, more land committed for free to build cheap housing means an even deeper bite into their fiscal coffer.
The government will also need to keep property developers interested in the project.
The biggest developers, including Vanke, Poly Real Estate (600048.SS), and China Overseas Land (0688.HK), are finding that they are earning lower margins than they expected, typically 6-8 percent, but close to zero in some cases.
By contrast, commercial home development often provides over 30 percent margins.
To be sure, developers have other incentives, including polishing their social responsibility credentials, cementing relations with government officials and finding a stable revenue source as a buffer against downturns.
But will they stay?
“Ideally, these projects would bring us several percent of profits as a normal business does, so that we have the enthusiasm to do it as long as needed,” said Duan Jixian, manager of the Longhua affordable housing project with Vanke in Shenzhen.
His company, China’s largest listed home builder, has pledged to help build 1 million square meters of affordable housing nationwide this year.
The 210,000 square meter public-rental project Vanke is now constructing in the outskirts of Shenzhen will provide almost no profit — or even a loss — if prices of construction materials such as steel and cement continue to increase, he said.
Squeezed by its own tight deadline, Beijing may have to take bolder steps and allow financial innovations including real estate investment trusts and insurance funds to invest in affordable housing very soon, said Meng Xiaosu, advisory chairman of China National Real Estate Development Group, the country’s biggest state developer.
“China will make changes when it has no other options. And now is almost the time,” said Meng, who helped design the country’s housing reform in 1998 which allowed real estate firms to build commercial homes and sell onto the market.
And then there is the problem of how the apartments are built, distributed and managed.
Local media in Shenzhen have reported many stories similar to that of the Taoyuan residents, with people complaining about poor construction standards at some developments and troubles ranging from mildew to bursting pipes.
State media have also reported cases of luxury cars parked in the developments and wealthy families buying flats earmarked for low-income residents. And senior local officials have appeared on the lists of applicants in Beijing, Wenzhou, Shenzhen and other cities.
In Shenzhen, housing authorities said recently that a third of the 8,148 applicants since the end of 2009 did not meet qualification requirements.
The city has so far punished several hundred, naming them in public statements, fining each 5,000 yuan and forbidding them to apply again in the next three years.
Other cities have done less about the problem.
“The punishment in China is too light so everyone would like to try their luck (at illegally acquiring a public apartment). Why not?” said Cai from the real estate association.
Such problems are a worry for the government, which hopes that its affordable housing push will help stanch unrest among the millions of migrants who have now settled in the country’s cities.
Shenzhen plans to adopt some of the tactics of neighboring Hong Kong, pressing criminal charges and large fines. The proposal has yet to be approved by the local people’s congress.
“We will seriously punish those cheating or illegally using affordable housing,” city mayor Xu Qin told a meeting earlier this month.
“We should build affordable housing schemes to win the hearts of our people.”
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Editing by Vinu Pilakkott