Chinese real estate seems to be improving in recent months. It seems that the Evergrande crisis and the subsequent images that were observed of many citizens who will be left without their homes, despite paying their financing, are being left behind. The sector is accelerating again, as can be seen in the latest official data and its outlook may be positive.
As figures from China’s National Bureau of Statistics show, new home prices in the country have risen in the past month at the fastest pace in 21 months, showing demand is heating up again. Specifically, in the month of March real estate rose 0.5% compared to the previous month, due to the fact that more and more cities are seeing a significant upturn in interest in home acquisition.
The question is whether this trend is sustainable or raises some doubts, taking into account that the following month the bias changed. Housing prices in China rose at a slower pace due to the drop in demand. They advanced 0.4% month-on-month, one tenth less than the previous month, according to official numbers. In the view of Cosmo Zhang, a credit analyst at Vontobel, although domestic home sales are rising, “the path of recovery for the Chinese real estate sector remains bumpy” given the recovery of “the Chinese economy,” which is “more slow than expected.
“The smaller rise is not surprising, since buyer confidence has not yet fully recovered and many of them are waiting,” says Zhang. “Buyers will most likely react if confidence in economic growth increases and house prices stabilize or rise,” she adds.
However, despite the decline in real estate bond prices, the Vontobel expert believes that the recovery in the Chinese real estate market is continuing. “We also recognize that some companies exposed to the sector will recover faster than others,” he says.
The latest data on the Chinese consumer price index (CPI) and producer price index (PPI) and credit conditions point in the direction of disinflation for China and indicate a slowdown in economic growth. While the US and Europe are busy fighting inflation, China could face deflation challenges that Japan has experienced in recent decades.
The Chinese government has the need, incentive and ability to adopt more favorable policies, including the suspension of monetary policy, to boost the economy and employment. These policies are favorable for the real estate sector, which is of key strategic importance for China’s economic growth in 2023 and 2024, especially when all three drivers, ie net export, consumption and investment, register moderate growth.
The market continues to see developer defaults: KWG Group and another struggling company, Jiayuan, have recently been ordered bankrupt by Hong Kong courts. While the Jiayuan liquidation is not a surprise and should be positive for debt settlement cases prevailing in the Chinese bankruptcy space, the events at KWG Group and Dalian Wanda demonstrated that private company developers need time to fully recover. Obviously, these events caused a lot of sell-off and volatility in the market in recent weeks.
“We believe that the recent decline in real estate bonds is rather technical in nature and that some developers’ bond prices have corrected beyond what can reasonably be explained by improving fundamentals,” Zhang says. “That reminds investors to take a good hard look at the fundamentals of companies,” she adds.
China’s economic recovery has continued to progress since the government changed Covid policies in late 2022. The country’s GDP grew 4.5% year-on-year, or 9.1% on a seasonally adjusted annual basis.
The recovery has been, unsurprisingly, led by domestic demand, as was the case after most of the world reopened after the pandemic. However, despite evidence of a strong recovery and that the housing crisis is finally reaching a resolution phase, Chinese financial asset prices have failed to improve the outlook. “We think investors who look objectively at ongoing economic trends and select carefully could be rewarded over time,” Zhang concludes.