Little Shelter for China in Affordable Housing

JUNE 24, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

For investors worried about a China real-estate crash laying waste to their portfolios, affordable housing will provide some basic shelter.

The government has promised to start 10 million affordable homes over the course of 2011, up from 5.9 million in 2010. That suggests construction of about 5.4 billion square feet of housing, the equivalent of 30% of total new housing starts in 2010. But the headline figure overstates the actual boost to construction from the program.

Rosealea Yao, a specialist on the Chinese housing market at research firm Dragonomics, calculates that only eight million new homes represent actual new construction. To get to its impressive 10 million figure, Ms. Yao reckons the government is adding two million to the total by reclassifying homes built by companies or government departments for employees as affordable housing.

Even for the eight million homes that do represent a genuine supply boost, finding the cash to fund the building will be easier said than done. The central government is stumping up only $15 billion of the $215 billion total cost. That leaves local government and employers scrambling to make up the difference. And they need to do so with tight budgets and weak incentives to invest.

For local governments, the mandate is to use cash from sales of land to cover their share of the cost. But data from the Ministry of Land and Resources show revenue from land sales for the first five months of the year down 11% year on year.

As important, incentives to invest in affordable housing are weak. That is especially true for the rental housing that makes up four million of the promised 10 million total. For some projects, rental income will be inadequate to cover anything more than interest payments and maintenance. Without enough income to repay principle on the loans, banks are understandably reluctant to lend.

It isn't all bad news. A smaller building program than first appears still represents significant investment. The government is moving to ease financing constraints, with a new regulation making it easier for local government financing vehicles to raise funds for affordable housing projects. Top level commitment from Premier Wen Jiabao also makes a difference.

But China's affordable housing effort merely will soften the fall in investment from the commercial sector, preventing a collapse rather than pushing growth higher. Investors who bet on the China growth story will not find themselves on the street. But after the luxury conditions enjoyed during the real-estate boom, a shift into public housing may be difficult to stomach.

Write to Tom Orlik at Thomas.orlik@wsj.com