China’s real estate sector could improve; will not be a high-growth market: analysts

The tide may be turning in China’s struggling real estate market.

Investor confidence in the sector appears to be improving, as bond volumes and prices have risen in recent weeks, partly boosted by the government’s pledge to support the sector and some policy easing.

But analysts say China’s booming real estate market could be a thing of the past, and set to be “changed forever” following the sector’s recent shakeup.

S&P Global Ratings said in a report in early April that China’s crackdown on its residential housing market had “bottomed out”, but it will take several quarters for markets to feel the effects of regulatory easing. .

“When China’s residential market emerges from this correction, it could be changed forever,” S&P said. “We expect fewer developers to be able to employ the high-leverage, fast-turnover strategy that has brought past success.”

Recent reports show that some cities and banks are ready to support real estate again after a drop in home sales in recent months.

Since March, due to weakening market demand, banks in more than 100 cities across China have lowered mortgage rates by an average of 20 to 60 basis points, Zou Lan, director of the People’s Bank of China Financial Markets Department.

He also noted how Covid had affected some people’s income and their ability to pay mortgages on time.

“The position of the government [is] trying to prevent contagion, preventing spillovers from the real estate sector to the real economy,” Gary Ng, Asia-Pacific economist at Natixis, told CNBC in a phone interview earlier this month.

Any change in China’s real estate sector has significant implications for the economy since real estate and related sectors account for about a quarter of GDP, according to Moody’s. The latest wave of Covid restrictions added pressure on growth that was already slowing.

“The measures may have been too strict. Now we see this fine tuning of the policy,” Ng said. “The worst time is over for developers who are broadly in line with the current goal or regulatory framework.”

The problems for property developers in China came to a head after authorities introduced the so-called “three red lines” policy in August 2020, aimed at reining in developers after years of growth fueled by excessive debt. The policy imposes a limit on debt relative to a company’s cash flow, assets and capital levels.

While many developers have reduced their debt levels as a result, the result of this policy has been that banks have become less willing to lend to the sector.

In this context, Evergrande, the most indebted developer in the world, fell into default for the first time at the end of last year. As the debt crisis subsided, other Chinese developers also began to show signs of strain – some missed interest payments, while others defaulted on debt altogether.

Bond issuance in the Asian high-yield bond market, dominated by Chinese property developers, collapsed in the first quarter of this year. The region issued just $4.4 billion in debt, about 85% less than a year ago, according to Dealogic data.

“This is because Chinese real estate developers have been largely cut off from the bond market amid an increasing number of stress and distress situations in the sector,” Dealogic said.

However, sentiment turned slightly in mid-March after China signaled support for its businesses and said authorities would work to stabilize its struggling real estate sector.

Bond trading volumes in the real estate debt market jumped to nearly $700 million in mid-March, an increase of nearly 20% from the more than $583 million traded at the start of the month. months, according to data from electronic fixed-income trading platform MarketAxess.

At the end of March, volumes increased further to cross $700 million, before falling slightly in April.

Bond prices also rose accordingly. The Asian-dollar high-yield index Ice Bofa climbed more than 15% between mid-March and early April.

Three provinces have also eased their policies, which include removing restrictions on home purchases for those without full local residency status – and that should improve sentiment in the short term, Nomura said in a report from the April 4.

“These policy easing measures are in line with our expectations and confirm local governments’ growing awareness and efforts to counter the rapidly deteriorating physical real estate market,” Nomura said, citing government data that shows sales in 30 major cities fell 47% annually. -over the year in March.

Natixis’ Ng said more large developers, especially state-owned ones, can now buy land or acquire other real estate assets at cheaper prices. He noted that the company’s analysis revealed that seven out of 10 land acquisitions so far this year were by state-owned companies, a sign that the private sector was still struggling.

Earlier this month, developer Kaisa announced that she has entered into a strategic cooperation with China Merchants Shekou Industrial Zone Holdings and China Great Wall Asset Management, both state-owned. The deal is expected to include joint ventures and asset acquisitions, a Hong Kong exchange filing showed.

Despite the optimism, the situation ahead for developers could deteriorate further, analysts say.

S&P pointed out that so far the policy easing has applied to the demand and not the supply of units.

“Supply may be limited even if buyer sentiment improves as funds are prioritized to complete pre-sold homes and pay down debt,” he said in a briefing last week. “Faults will increase as [the] the down cycle persists under the shadow of sluggish selling, [continued] narrower funding channels due to lack of trust.”

The ratings agency said it believes 20 developers are now facing a cash crunch – and a further 4% could be at risk under the joint venture model.

Earlier this year, several developers announced that they not being able to publish the financial results in time.

Despite news of increased support for real estate, Ng said Beijing’s tone remains focused on preventing speculation in the once-hot market, which means house prices won’t rise as much.

As a result, businesses that once profited from soaring house prices are going to have to adapt, he said. “We will not see the developers [be] able to repay their debt. »

The fundamental conclusion from recent developments is that China’s policy on real estate investment has changed, analysts said.

“Over the long term, policy will be guided by the principle that ‘housing is for living, not speculating,'” S&P Global said. “New business models will have to, at least to some extent, meet this goal.”

Eric Xin, managing director of Citic Capital, told an AVCJ investment conference in Beijing last October that real estate is likely to become a public utility so that more people can afford housing. in China.

“That’s why you see that all developers are in trouble, because utilities should be dominated by public companies,” said Xin, also a managing partner at Trustar Capital. “It shouldn’t be a high priority [of] Capital city. On the other hand, capital should go into innovation.”