Investor confidence in China’s property market appears to be boosted by the government’s promise to support the sector and some policy easing. But analysts say China’s high-growth property market may be a thing of the past.
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The tide may be impacting China’s battered property market.
Investor confidence in the sector appears to be improving as bond trading volumes and prices have increased in recent weeks, fueled in part by government promises to support the sector and some easing policies.
But analysts say China’s high-growth property market could be a thing of the past, set to be “changed forever” following the recent shake-up in the sector.
S&P Global Ratings said in a report in early April that China’s housing crackdown has “bottomed out,” but it will take several quarters for markets to feel the impact of the deregulation. .
“When China’s residential market emerges after this correction, it could be forever changed,” S&P said. “We anticipate fewer developers will be able to use the high-leverage, fast-growth strategy that has worked in the past.”
Recent reports suggest that some cities and banks are willing to support real estate again after home sales plummeted in the past few months.
Since March, due to weak market demand, banks in more than 100 cities in China have reduced their mortgage rates by an average of 20 to 60 basis points, said Zou Lan, head of financial markets. of the People’s Bank of China, told reporters on Thursday.
He also noted how Covid has affected some people’s incomes and their ability to pay their mortgages on time.
It’s hard to see the situation resolved this year… We will see developers unable to pay their debts.
Gary Ng
Asia-Pacific economist, Natixis
“The government’s position [is] try to contain the contagion, prevent the spillover from the real estate sector to the real economy,” Gary Ng, Asia-Pacific economist at Natixis, told CNBC in a recent interview. phone at the beginning of the month.
According to Moody’s, any change in China’s real estate industry is significant for the economy as real estate and related sectors account for about a quarter of GDP. The latest wave of Covid restrictions added pressure to already slowing growth.
“The measures may have been too tight. Now we see the adjustment of the policy,” Ng said. “Basically, the worst times have passed for those developers who are generally in line with the current goal or regulatory framework.”
The problems of property developers in China became acute after authorities enacted a so-called “three red lines” policy in August 2020, aimed at curbing developers. developed after years of growth due to heavy debt. Debt limit policy is concerned with a company’s cash flow, assets, and capital levels.
While many developers reduced their debt levels proportionally, the result of this policy was that banks became less willing to lend to the sector.
Against this backdrop, Evergrande, the world’s most indebted developer, first fell into default late last year. As the debt crisis unraveled, Other Chinese developers are also starting to show signs of tension – some missed interest payments, while others defaulted entirely.
Bond trading volume increases, prices increase
Bond issuance in Asia’s high-yield bond market, dominated by Chinese property developers, shrank in the first quarter of this year. The region has only issued $4.4 billion worth of debt, about 85% less than a year ago, according to data from Dealogic.
“This is the result of Chinese property developers being cut off from the bond market amid an increasingly tense and distressing situation in the sector,” Dealogic said.
However, feelings turned slightly in mid-March after China signals support for its companiesand indicated that the authorities would work towards stability in its troubled real estate sector.
Bond trading volume in the real estate debt market grew to nearly $700 million in mid-March, up nearly 20 percent from the more than $583 million traded at the beginning of the month, according to data from the trading platform. MarketAxess electronic fixed income.
Towards the end of March, volume increased further, surpassing $700 million, before falling slightly again in April.
Bond prices also increased accordingly. Ice Bofa’s high-yield Asian dollar corporate index gained more than 15% between mid-March and early April.
The three provinces have also eased their policies, including removing home-buying restrictions on local non-residents – and that should lift sentiment in the short term, Nomura said. know in a report on April 4.
“These policy easing measures are in line with our expectations and confirm the growing awareness and efforts of local authorities to combat the rapid deterioration of the physical property market.” , Nomura said, citing government data that sales in 30 major cities fell 47 percent on the year. -on-year in March.
Natixis’ Ng said an increasing number of large developers, especially state-owned companies, are able to buy land or other real estate properties at cheaper prices than they do today. He noted that the company’s analysis shows that seven out of 10 land acquisitions so far this year have been by state-owned enterprises, a sign that the private sector is still struggling.
Earlier this month, the developer Kaisa announces strategic cooperation with China Merchants Shekou Industrial Zone Holdings and China Great Wall Asset Management, both state-owned. The deal is set to include joint ventures and asset acquisitions, a Hong Kong-based exchange filing showed.
Outlook for Developers
Despite the optimism, the situation ahead for developers could be even worse, according to analysts.
S&P points out that so far the policy easing has only applied to the demand side, not to the supply side.
“Supply may be constrained even as homebuyer sentiment improves as funds are prioritized to complete pre-sold homes and repay loans,” it said in a briefing last week. “The default value will increase when [the] the downtrend persists in the shadow of sluggish sales, [continued] funding channels narrow due to lack of confidence. “
The rating agency said it believes 20 developers are currently facing a liquidity crunch – and another 4% could be at risk under the joint venture model.
Earlier this year, several developers announced that they would unable to disclose financial results on time.
‘Not for speculation’
Despite news of more support for real estate, Ng said Beijing’s tone remained focused on staving off speculation in the once-hot market, which means house prices will decline. didn’t increase that much.
As a result, companies that have benefited from rising home prices will need to adapt, he said. “Will we see developers [be] able to repay their debt. “
The main takeaway from recent developments is that China’s policy towards real estate investment has changed, analysts say.
In the long term, policy will be guided by the principle that ‘housing is for living, not speculation’, S&P Global said. “New business models, at least to some extent, need to align with that goal.”
In October, Eric Xin, chief executive officer of Citic Capital, said at an AVCJ investment conference in Beijing that real estate will likely become a public utility so more people can buy houses. China.
“That’s why you see all the developers struggling, because utilities should be dominated by SOEs,” said Xin, also managing partner at Trustar Capital. “It shouldn’t be a big focus [of] capital. On the other hand, capital should go into innovation. “
