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Analysis: Property growth hinges on China ties, analysts say

The Taiwanese property market has boomed for almost three years and looks set to continue over the short term, but analysts are now warning the bubble could burst if cross-strait ties fail to deliver anticipated returns.

They say that quick upturns in property, which crashed in 2003 when the nation suffered its worst economic setback amid an outbreak of SARS, are built on ample liquidity from local investors and repatriated profits by Taiwanese investors in China.

"Market expansion mainly came from sales in luxury residential properties, in particular in the greater Taipei district," Century 21 Taiwan general manager Jim Wang (王福連) said.

With mass capital inflows from offshore rekindling local investment, retail property prices have recovered an average 60 percent since then, while luxury apartments have spiked as much as 80 percent.

Property transactions last year were up 28.7 percent compared with 2003, while the the central bank says outstanding housing mortgages at the end of last year totaled NT$4.41 trillion (US$133.84 billion), up 45.1 percent from 2003.

Low bank interest yields and low mortgage rates had prompted people to invest their money in real estate for higher returns, said Victor Chang (張欣民), an analyst at Sinyi Real Estate Inc (信義房屋), the nation's largest real-estate agency.

Wang said with ample liquidity, prices of homes may rise another 10 to 20 percent this year.

Many Taiwanese investors in China were sending back money to buy property on optimism for better cross-strait ties, Wang said.

"Such upbeat sentiment is also spreading to commercial properties which are lagging behind residential buildings in prices," he said, predicting a 20 to 30 percent price growth this year.

Analysts say for the property to continue its run, improved cross-strait ties were a must, and this had many investors hoping a new government after the presidential election next year would seek better business relations with China.

One analyst with a Japanese brokerage, who declined to be named, said that entering the Taiwanese property market at current levels could prove risky.

"Speculative buying accounted for 25 percent of the total transactions in 2006, compared with 6 percent three years ago. I am afraid that a market bubble is growing so fast that a burst will follow," he said.

He said the current buying spree is largely based on predictions that the Chinese Nationalist Party (KMT) would beat the Democratic Progressive Party in the presidential election.

This had many investors punting that improved relations with China would automatically follow, he said.

"But politics is full of uncertainty," he added.

Chu Yen-min (朱晏民), research chief of KGI Securities Co (中信證券), said no matter which party won, pursuing constructive ties with China was an irreversible trend.

"As China's economy is growing so fast that improving relationships with the mainland can only help boost Taiwan's economy ... A better local economy will no doubt attract more buying in the property market," Chu said.

A recent Collier International report said new supply of office space in Taipei was expected to remain limited this year, while the vacancy rate might continue to fall due to rising demand.

The vacancy rate was 8.44 percent in the fourth quarter of last year, which showed a 1 percent drop from a year earlier.

The report said rental rates of Taipei's office spaces in the fourth quarter grew 1.8 percent from a year ago and expected the commercial property market to remain stable in the upcoming two years.
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