For years, Shenzhen house flippers have taken advantage of loopholes to get rich. A popular real estate investment club has come under the microscope as the city government struggles to cool the real estate obsession.
A construction site in Shenzhen. Photo from CFP
By ZHANG Ziyi, LIU Chenguang, ZHANG Xiaoyun
Once again, frantic homebuyers and scalpers in Shenzhen have caught the eye of the local government that has been ceaselessly pouring cold water on the overheated market for months.
On April 7, Shenzhen-based real estate influencer LI Xuefeng, or better known as Shenfangli on Sina Weibo with 1.4 million followers, was accused of brokering real estate fraud, providing workarounds to circumvent house purchase rules. Hundreds of screenshots and documents purportedly showed how Li provided his followers with the kind of false information needed to bypass purchase restrictions and get loans from banks. Shenfangli is said to have provided fake account statements. After five days of silence, on April 13, Shenfangli appeared online. “Good morning,” he said.
In the comments of his greeting, followers and members rallied to his support, despite the dubious legality of his activities. The posts and reposts display undisputed faith in Shenzhen’s real estate market, and for the past ten years, this faith has not been misplaced. A constant dribble of new policies intended to stop speculation has left countless loopholes, creating plentiful opportunities for dodgy deals and reckless risk-taking. Since last July, regulation has been more rigorous than ever before, and so far, so good, but the speculators have not gone anywhere nor found something more interesting to do. They await the next big thing.
On the surface, Shenfangli runs an everyday real-estate financing service. For 12,980 yuan (US$2,000) a year, house flippers, first-time buyers and hardcore investors can become VIP members of Shengfangli’s “club”, and share resources — money or eligibility — with one another.
Shenfangli's online persona had only one thing to say: buy a house in Shenzhen anyway you can. His followers were told that it was perfectly fine to borrow huge amounts of money to buy property, as “the quickest route to financial independence." According to him, it is a perfectly safe and normal thing to do.
First-time buyers who have paid local taxes for a stipulated period can pool money with non-locals or professional house flippers to buy houses, often in new developments New houses are usually cheaper thanks to price controls, but assigned through a lottery. They can also negotiate terms to obtain bank loans together, sometimes business loans or home equity loans that theoretically cannot be used to fund down payments. Reportedly, Shenfangli lends to buyers short on cash using the fees collected from members. It is estimated that over 3,500 people have signed up for his club.
The exposé came on the eve of the latest clampdown on speculation. On April 8, the Ministry of Housing and Urban‑Rural Development summoned officials from five cities and told them to act firmly against soaring house prices. The same day, an investigation began into Shenfangli for aiding and abetting loan fraud.
Shenfangli is filled with faux indignation and bluster. “What’s illegal about two people each owning half a house?” he told Jiemian News. “What’s illegal about two people splitting a business loan or a home equity loan? The law doesn’t say any of these things are illegal.”
Homebuyers confirm that the practice has been going on in Shenzhen for as long as one can remember. In China, this story is all too common. There are plenty of people like Shenfangli who feed people’s anxieties to gouge home prices. If people don’t have enough money to join the game, they encourage them to apply for loans. Making down payments with loans is widespread, though banned, at least in theory, in many jurisdictions.
“It’s very common. Let’s say my friend is eligible to buy but doesn’t have the money. I have the money but am not eligible. We agree on the percentages, buy a new house and flip it for a profit,” one person explained.
It’s no news that business and home equity loans are taken out to buy houses. But things have quieted down a lot since last year when the authorities tightened scrutiny. But the problem with Shenfangli is the sheer scale and flagrancy of his practice. The fact that he has acted as a lender himself may have also rubbed regulators the wrong way. He claims that loans have never been offered to members but there are plenty who claim otherwise.
Shenfangli is also in hot water for multi-level marketing – paying existing members a small commission for referring a friend: “It’s just me paying a small marketing expense. What’s wrong with that?”
Shenfangli’s story is clear proof of the madness that reigns in Shenzhen’s property market. Last July, the Shenzhen government made its umpteenth attempt to rein in prices, mostly by steering deals away from speculators. Popular frauds extend well beyond simple forgery and include sham marriages and fake divorces. Now, buyers need a local residence permit and to have paid local taxes for three years. Price caps are intended to curb flipping.
And the market has cooled quite a bit, though the real picture has been distorted by COVID. Monthly transactions have plummeted by as much as 65 percent. Houses are staying on the market longer, and buyers are bidding less. But analysts attributed the cooling to nothing more than tight credit.
It is illegal to use business loans for residential real estate, but that doesn’t stop people from trying. In April alone, the Shenzhen government combed through 150,000 business loans totaling close to 200 billion yuan (US$30 billion). Only 21 loans of those loans, a paltry 50 million yuan, have been recalled — including one taken out by a Shenfangli member. In January, after 12 cases of fraud at a new housing project, the government came up with three-year market bans for people who provide false information during home purchases.
It remains to be seen whether acting against one real estate club will make any difference at all, or whether rules and restrictions, in general, will have any effect, though house flippers seem to be out of ideas, at least for now.
Shenfangli may be the chosen whipping boy for now, but real estate influencers are still filling their followers’ empty heads with rags to rich stories. “Everyone knows” that Shenzhen real estate can only go up.