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China’s real estate sector can be improved; will not be high-growth market: Analysts

Investor confidence in China’s real estate market appears to be strengthened by the government’s commitment to support the sector and some easing of policies. But analysts say China’s high-growth real estate market may be a thing of the past.

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

Investor confidence in the sector appears to be improving as bond trading volumes and rates have risen in recent weeks, partly strengthened by the government’s commitment to support the sector and some easing of policies.

But analysts say China’s high-growth real estate market may be a thing of the past, and it will be “changed forever” following the recent upheaval in the sector.

S&P Global Ratings said in a report in early April that China’s political repression of its housing market is “bound”, but that it will take several quarters for the markets to feel the effects of the regulatory easing.

“Once China’s housing market comes out of this correction, it could change forever,” S&P said. “We expect fewer developers to be able to apply the highly leveraged, fast-churn strategy that led to previous success.”

Recent reports show that some cities and banks are willing to support real estate again after a dip in home sales in the last few months.

Since March, banks in more than 100 cities in China have lowered mortgage rates by an average of 20 to 60 basis points due to weakened market demand, Zou Lan, director of the People’s Bank of China’s financial markets division, told reporters on Thursday.

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

It’s hard to see the situation resolved this year … We will see that developers are not able to repay their debts.

Gary Ng

Asia-Pacific Economist, Natixis

“The Government’s position [is] trying to prevent the spread and prevent the spillover from the real estate sector’s spillover to the real economy, “Gary Ng, Asia-Pacific economist at Natixis, told CNBC in a telephone interview earlier this month.

Any change in China’s real estate industry has significant consequences for the economy, as real estate and related sectors account for about a quarter of GDP, according to Moody’s. The recent wave of Covid restrictions has put pressure on growth, which was already slowing.

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

The problems for real estate developers in China came to a head after the authorities rolled out the so-called “three red lines” policy in August 2020, which aimed to rein in developers after years of growth driven by excessive debt. The policy sets a limit on debt in relation to a company’s cash flows, assets and capital levels.

While many developers reduced their debt levels accordingly, one result of the policy was that banks became less willing to lend to the sector.

Against this background, Evergrande, the world’s most indebted developer, fell into default for the first time last year. As the debt crisis resolved, other Chinese developers also began to show signs of strain – some missed out on interest payments while others defaulted on their debt completely.

Bond trading is rising, prices are rising

Bond issuance in Asia’s high-yield bond market, dominated by Chinese real estate developers, fell in the first quarter of this year. The region only issued $ 4.4 billion in debt, about 85% lower than a year ago, according to Dealogic.

“This was a result of Chinese real estate developers being largely cut off from the bond market amid a growing number of stressful and distressed situations in the sector,” Dealogic said.

However, the mood turned a bit in mid-March after China signaled support for its companies and indicated that the authorities would work towards stability in the struggling real estate sector.

Bond trading in the real estate market jumped to nearly $ 700 million in mid-March, an increase of nearly 20% from over $ 583 million traded at the beginning of the month, according to data from the online fixed income trading platform MarketAxess.

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

Bond prices also rose correspondingly. The Asian Bofa Asian Dollar Index for High-Profit Companies has risen more than 15% in the period between mid-March and early April.

Three provinces have also loosened their policies, which include removing restrictions on home purchases for those without full local residency – and that should lift the short-term mood, Nomura said in a report on April 4.

“These policy mitigation measures are in line with our expectations and confirm the growing awareness and efforts of local authorities to address the rapid deterioration of the physical real estate market,” Nomura said, citing government data that sales across 30 major cities fell by 47% year. – in the year in March.

Natixis’ Ng said several large developers, especially state-owned ones, can buy land or acquire other real estate assets at cheaper prices now. He noted that the firm’s analysis showed that seven out of 10 land acquisitions from year to date were by state-owned enterprises, as a sign that the private sector was still struggling.

Earlier this month, developer Kaisa announced that it was entering into a strategic partnership with China Merchants Shekou Industrial Zone Holdings and China Great Wall Asset Management, both of which are state-owned. The deal is set to include joint ventures and asset acquisitions, a Hong Kong exchange filing showed.

Outlook for developers

Despite the optimism, the situation ahead for developers could worsen further, according to analysts.

S&P pointed out that the political easing so far has been on the demand side and not on the supply of units.

“Supply may be limited, though the mood of homebuyers is improving because funds are prioritized to complete pre-sold homes and repay debt,” it said in a briefing last week. “Default will increase as [the] downward cycle continues in the shadow of sluggish sales, [continued] narrower funding channels due to lack of confidence. “

The rating agency said it believed 20 developers were now facing a liquidity squeeze – and a further 4% could be at risk under the joint venture model.

Earlier this year, several developers announced that they would not be able to publish financial results on time.

‘Not for speculation’

Despite news of more real estate support, Ng said Beijing’s tone remains focused on preventing speculation in the once-hot market, meaning house prices will not rise as much.

As a result, companies that once profited from rising house prices will have to adapt, he said. “We do not want to see developers [be] able to repay their debts. “

The fundamentals of recent developments are that China’s policy on real estate investment has changed, analysts said.

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“In the long run, the policy will be governed by the principle that ‘housing is for living, not speculation,'” S&P Global said. “The new business models will, at least to some extent, have to fit that goal.”

Back in October, Eric Xin, CEO of Citic Capital, said at an AVCJ investment conference in Beijing that real estate is likely to become a public supply so more people can afford housing in China.

“That’s why you see all the developers are in trouble because utilities should be dominated by state-owned enterprises,” said Xin, also managing partner at Trustar Capital. “It should not be a big focus [of] capital. On the other hand, capital should go into innovation. “

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