Dark clouds remain for China’s real estate market

China’s beleaguered property sector has shown no signs that a turnaround is imminent, a move that could help the country’s struggling economy.

Although the sector has so far avoided a complete meltdown, as many predicted months ago, a double whammy of defaults among developers and falling house prices continue to plague the industry. .

According to the latest data, property sales in China in April fell at their fastest pace in 16 years, despite several rounds of policy easing.

New home sales last month fell 47% year-on-year, an exacerbation from March’s 26% drop and the worst drop since 2006, according to the National Bureau of Statistics. Prices in 70 key cities have now fallen for eight consecutive months.

“Conditions in China’s real estate sector continue to deteriorate, with shutdowns and other Covid restrictions exacerbating the recession,” said Logan H. Wright, partner and managing director, China Markets Research, Rhodium Group. “The main issue remains the overall decline in sales and prices, which is creating an annualized revenue shortfall for developers of around 3-4% of GDP compared to last year. Interest rate cuts may help at the margin, but only after the threat of foreclosure is lifted, and likely only in major cities as well.

Meanwhile, the specter of mass flaws among developers still looms large.

Evergrande Group China
,

once the country’s largest developer and now the most indebted, was declared in default last year and is currently restructuring and offloading assets to pay off its estimated $300 billion in arrears.

China’s third-largest developer, Sunac China Holdings, this month missed its deadline to repay $745 million in offshore bonds and said publicly it was likely not to repay its additional debt.

Trading in its Hong Kong-listed shares was halted last month, along with several other major developers, after they failed to disclose their annual financial results. At the time of the trading freeze, Sunac’s share price had fallen nearly 80% from a year earlier. Last week, Fitch Ratings downgraded Sunac bonds for the second time this year, putting them further into junk status.

Canton R&F Properties

(2777.Hong Kong), a major developer with many large-scale global projects, missed similar payments and mentioned recently he sold his stake in a London project at a loss of $234 million.

Evergrande, Sunac and R&F did not respond to requests for comment.

Flaws are unlikely to diminish any time soon. This is partly because many companies that have issued more debt than they can repay have undertaken maturity extensions and bond swaps. In fact, these practices, which often serve to simply push back default dates, have increased this year in proportion to the defaults themselves.

But they can only be postponed for so long. About a third of China’s high-yield property companies will default in 2022,

Goldman Sachs Group

said in a note Friday.

“We view bond swaps and maturity extensions as efforts that provide short-term credit stress relief by pushing bond maturities to a later date, but are not sufficient to address credit issues,” according to the note.

Meanwhile, policy measures targeting the sector have sent mixed signals.

On Saturday, China’s legislature approved an expansion of the property tax trial programs in Shanghai and Chongqing, with details to come, he said.

The move is touted by policymakers as a way to curb speculation and make home ownership more affordable for the middle class. The mantra “housing is for living in, not speculation” is mentioned almost every time a major policy in the sector is announced.

But a broad property tax could achieve a much more crucial goal for the power of the Communist Party, by promoting social stability.

Indeed, local governments are more dependent on the cost of selling homes than any other source of revenue, but they have lost this vital flow as sales decline. A property tax, especially on high-value properties, would partially mitigate this downward trend in income.

On Friday, China surprised observers by make the biggest cut ever a key mortgage interest rate. The central bank cut its five-year prime rate by 15 basis points to 4.45%. The five-year rate tends to be the benchmark used by banks to price mortgages, while the one-year rate, which has not changed, is the metric for most other loans.

Despite the sharp reduction, markets were not swayed and analysts remained skeptical.

“The effectiveness of lowering mortgage rates is limited by lockdowns, with limited impact on (mortgage) consumer sentiment; the reopening and recovery of buyer sentiment is more critical in our view,” said Cheng Wee Tan, senior equity analyst at Morningstar. Barrons.

In a note released on Monday, Goldman Sachs said: “With record unemployment rates and the lowest expectations for future house prices since 2015, it’s a tough climb for the government to stabilize the real estate sector.” .

Any chance of a strong housing recovery, like the one that took place after China’s Covid 2020 wave, seems unlikely, the authors said. “Despite continued policy easing, challenges remain in the housing market, which could prolong the low interest rate environment.”

Penny D. Jackson