Investors Switch Funds into Safer Alternatives amid Fears of Stock Market Correction

An exodus of speculative money from the A-share markets to the less volatile property market is providing an added boost to residential prices in major cities, according to property agents and economists.

With fears growing of a stock market crash after major mainland indices hit record highs last month, investors are switching to safer investment alternatives such as flats.

The return of investors, aided by strong underlying demand, is expected to bolster confidence in the mainland property market.

Shanghai, in particular, is forecast to experience price rises of up to 15 per cent in the second half of the year after a market lull.

Shenzhen registered the biggest rise in prices for new homes last month among 70 major mainland cities - at 12.3 per cent year on year - despite talk of the authorities planning to investigate price manipulation by developers in the city.

Jacky Fung, the general manager of Midland Realty's Shanghai branch, said the trend had been apparent since early last month.

"When the [central and city] governments announced measures to curb the booming property market in Shanghai in 2005, we saw investors' money withdrawing from real estate to the stock market. Now they have been coming back," Mr Fung said.

He said the switching of money to the property market became more marked when the stock market hit its historic highs on May 29.

Mr Fung said 15 per cent of the company's clients had sold or would sell 20 to 30 per cent of their stock investments and use the proceeds to buy property.

He said no formal survey was being conducted. "These clients had gained 60 per cent to 80 per cent from their stock investments," he said.

Liao Qun, the chief economist at Citic Ka Wah Bank, attributed last month's double-digit rise in home prices in Shenzhen to stock market concerns.

"The impact is not only in Shenzhen but also in many cities of the mainland. The mainland's stock market will continue its bull run after the current correction, and hence such effect will be sustainable in the long term," Mr Liao said.

As with Mr Fung, Mr Liao said there were no hard figures on money flows from the stock market into property.

"But property sales rose by 31 per cent month on month in May in Shanghai and 25 per cent in Shenzhen, for which the money flows certainly played a major role," he said.

Lee Wee Liat, the head of research for Greater China at Jones Lang LaSalle, said property prices in second-tier cities such as Chengdu, Hangzhou and Tianjin were also benefiting from the switch in investor funds from the stock markets.

"Home prices in second-tier cities will catch up this year after lagging those of the first-tier cities," Mr Lee said.

Shanghai's Pudong district has once again become a major focus for investors.

"Investors are keen on buying residential properties in the Lianyang area of Pudong," Mr Fung said.

In view of the return of investors and strong demand from end-users, he expects middle and upmarket housing prices, which dropped modestly in the first quarter, will rise 10 per cent to 15 per cent in the second half.

Prices of middle to upmarket homes in Shanghai range from 7,000 yuan to 13,000 yuan per square metre. Luxury home prices start from 25,000 per square metre.

Alan Chiang, the head of DTZ residential department in the mainland, said: "The housing market obviously saw more capital inflows from the end of April to mid-June. This is partly because of investors shifting money from stock markets to property. It can seen in the sudden growth in transaction volumes."

For the first five months of this year, DTZ said transacted areas in the first-hand residential market in Shenzhen rose 43.54 per cent to 4.56 million square metres, while 4.07 million square metres of second-hand properties changed hands, up 34.35 per cent from a year ago.

Knight Frank research head Xavier Wong said the A-share market would become more volatile after its bull run compared with the property market.

"A shares will move up and down by 10 per cent a day but not in the physical property market, where there is a longer up and down cycle," Mr Wong said.

Hong Kong's property market enjoyed a near-10-year boom before the collapse of late 1997 but the stock market had experienced several major corrections during that period.

Alfredo Lobo, the managing director of Latitude Capital, said money would be diverted from property into stocks, given their high liquidity and attractive returns. "If people are making money on the stock market and they think they will continue to make money, it wouldn't make sense for them to shift into illiquid assets."

By Sandy Li and Peggy Sito