Chinese real estate stocks have surged this month.  But analyst warns of 'weak reality' compared to high expectations

Chinese real estate stocks have surged this month. But analyst warns of ‘weak reality’ compared to high expectations

House prices in China fell in October mainly due to lower prices in less developed, so-called Tier 3 cities, according to analysis of official data from Goldman Sachs.

Edition of the future | Edition of the future | Getty Images

BEIJING — China’s real estate sector is not yet ready for a quick recovery, despite a rally this month in shares of major real estate developers.

Indeed, Beijing’s recent support does not directly address the main problem of falling home sales and prices, analysts say.

Last week, shares of property developers surged after the central bank and the banking regulator issued measures encouraging banks to help the real estate sector. It comes with other supportive measures earlier this month.

Shares of country gardenChina’s largest developer by sales, more than doubled in November, and those of longfor jumped about 90%. Equities have already returned some of this month’s gains.

Meanwhile, iron ore futures have jumped around 16% this month – Morgan Stanley analysts say around 40% of China’s steel consumption is used in construction real estate.

The situation is characterized by “strong expectations, but weak reality”, and market prices have deviated from fundamentals, said Sheng Mingxing, ferrous metals analyst at Nanhua Research Institute, in Chinese translated by CNBC.

Sheng said it was important to check whether the apartments can be completed and delivered during the peak construction period of March and April.

This is truly a temporary relief for developers who face less debt repayment needs in the near future…

The new measures, widely reported in China but not officially released, stipulate loan extensions, call for treating developers the same whether they are state-owned or not, and support bond issuance. Neither regulator responded to CNBC’s request for comment.

“This is really a temporary relief for developers who have to meet fewer debt repayment needs in the near future – temporary liquidity relief rather than a fundamental turnaround,” said Samuel Hui, analyst based in Hong Kong, director, Asia-Pacific Business, Fitch Ratings, said on Wednesday.

“The key is that we still need the underlying fundamental home sales market to improve,” he said, noting that buyer confidence hinges on developers’ ability to complete construction and build. delivery of apartments.

Earlier this year, many buyers refused to continue paying mortgages on apartments when construction was delayed. Homes in China are typically sold before completion, generating a major source of cash flow for developers.

A long-term recovery

Analysts differ on when the Chinese real estate market will be able to recover.

Fitch said a timeline “remains highly uncertain”, while S&P Global Ratings senior director Lawrence Lu expects a recovery could occur in the second half of next year.

“If this policy is implemented quickly, it will stop the downward spiral of developers, it will help restore investor confidence [in] developers,” he said.

Residential home sales for the first 10 months of the year fell 28.2% from a year ago, the National Bureau of Statistics said last week. S&P Global Ratings said in July it expects a 30% drop in sales for 2022, worse than 2008, when sales fell about 20%.

A slowdown in economic growth, uncertainty over ongoing Covid checks and concerns over future income have dampened the appetite for home buying.

Added to these concerns is the fall in prices.

House prices in 70 cities fell 1.4% in October from a year ago, according to Goldman Sachs analysis of data released Wednesday.

“Despite more local housing easing measures in recent months,” analysts said, “we believe lower-tier city real estate markets are still facing strong headwinds from weaker growth fundamentals than major cities, including net population outflows and potential oversupply issues”.

The report said house prices in the largest Tier 1 cities rose 3.1% in October compared to September, while Tier 3 cities recorded a 3.9% decline during this period.

About two years ago, Beijing began cracking down on developers’ heavy reliance on debt for growth. The country’s most indebted developer, Evergrande, defaulted late last year in a high-profile debt crisis that rattled investor confidence.

Concerns about the ability of other property companies to repay their debt have since spread to once healthy developers.

Trading in the shares of Evergrande, Kaisa and Shimao is still suspended.

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While Covid controls have dampened China’s growth this year, difficulties in the housing market have also contributed significantly.

The real estate sector, including related industries, accounts for about a quarter of China’s GDP, according to analysts’ estimates.

“I think the real estate sector will become less of a drag on the economy in 2023,” said Tommy Wu, senior China economist at Commerzbank AG, on Wednesday.

“It is too early to say whether the measures deployed so far will be enough to save the real estate sector,” he said. “But that seems more reassuring now as it seems more likely that more aggressive measures will be rolled out if the housing downturn still does not turn around significantly in the months ahead.”

A longer-term transformation

Ultimately, China’s real estate sector is undergoing a state-led transformation – towards a smaller part of the economy and a business model much less reliant on selling apartments before completion.

The housing market is down about a third from a year ago and will likely stay the same size next year, S&P’s Lu said.

Public developers have held up better during the recession, he pointed out.

In the first three quarters of the year, Lu said sales for state-owned developers fell 25%, compared to a 58% decline in sales for non-state-owned developers.

And despite recent policy moves, Beijing’s stance remains firm in deterring large-scale home purchases.

From messages from the National Bureau of Statistics to the People’s Bank of China, official announcements this month reiterated that homes are for living in, not speculation – the mantra that has marked the beginnings of the real estate market crisis.

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