Property activity levels in China peaked in 2021, with recent data suggesting that the decline of the past 3 years shows no signs of abating, despite multiple policy easing measures, and that house prices and sales volume continue to fall, according to a recent Goldman Sachs report on the situation of the real estate sector in the Asian giant.
As seen in data from the National Bureau of Statistics of China (ONE), the value of real estate sales across the country in December 2023 was a drop of 17% year-on-year, and house prices in The 70 most important cities showed that their weighted average variation was a 2.4% year-on-year drop. “That said, despite the lack of recovery, we believe that the Chinese real estate sector is on an ‘L’-shaped trajectory,” warn experts at the US investment bank.
The financial institution’s economists in China state that the slowdown in real estate activity has probably exceeded underlying demographic demand, with a reduction in gross area sold and new construction of 38% and 52% in 2023 compared to the previous years. 2021 levels, respectively. “This suggests that the faster pace of decline in sales and new projects initiated is probably behind us,” they explain.
Faced with continued weakness, Chinese policymakers announced a series of easing in late January, including new guidelines to allow proceeds from bank loans secured by commercial property to be used for debt repayment, and the non-local government of Guangzhou completely relaxed restrictions on purchasing large homes, among others.
Looking ahead, Goldman Sachs’ team of China economists expect further relaxations in the housing sector, stemming from an acceleration in the renovation of urban villages and the construction of public houses, further reductions in ratios . down payment and mortgage rates, the greater laxity of restrictions on the purchase and sale of real estate in larger cities. In addition, more financial support to guarantee the delivery of preventive housing.
And on this last point, note that GFA finals have remained stable over the last 3 years despite the industry downturn, reflecting the priority policy makers give to project completion. “With additional easing measures, our China real estate team expects sales in the primary market to stabilize year-on-year in 2024, assuming a 6% increase in gross area sold and a 6% reduction in pre cio Medium of sale”, he analyzes.
Restructuring progress
Although three years of slowdown have passed, progress in restructuring the debt of the real estate sector remains slow. This is evidenced by the announcement by China’s Evergrande Group, on January 29, that the Hong Kong High Court ordered the company’s liquidation. “We believe that the impossibility of agreeing on a restructuring plan with offshore creditors was a factor that contributed to the request for liquidation of the company,” explains the North American bank.
Despite the slowness of the restructuring and the forecasts of new defaults, Goldman Sachs considers that the impact on China’s credit markets in dollars will be moderate. “We estimate that more than $130 billion of Chinese real estate bonds have gone into default over the past three years and, according to the ICE BAML AsiaDollar Index, Chinese real estate bonds represented less than 6.5% of the Asian real estate market by market value. at the end of 2023, compared to around 50% at the end of 2020… This indicates that a large part of the real estate losses in the fixed income markets have already been felt,” he analyzes.
These experts also point out that, despite significant defaults and losses in the bond markets and in shadow bank loans (i.e. trust loans) to the Chinese real estate sector, bank loans to real estate developers have continued to increase. in the last three years, although at a slow pace. The import of bank debt to real estate developers in 2023 was 7.2% higher than the outstanding balance at the end of 2021.
“This highlights that policy makers are focused on addressing credit ‘flow’ problems, directing much of its flexibility towards financing the completion of pre-sold but unfinished homes,” he explains.
Goldman Sachs forecasts 3.9% year-on-year growth in additional loans to new developers by 2024. Efforts to ensure the continued supply of bank credit to developers would reinforce their thesis that restructuring efforts would likely take many years, and that The Chinese real estate sector will follow an “L”-shaped trajectory. Time will tell.
