Roundup: What to expect from the Chinese real estate market in 2022

The Chinese real estate sector has been a major driver of the remarkable growth in the country’s economic and household wealth over the past 20 years, but it appears to have lost its luster in recent months in the midst of market turmoil such as developer defaults, and falling property sales and prices. This has led to a loss of confidence among investors and home buyers.

Although regulators and some local governments have started to reassure developers, investors and home buyers, observers are still concerned about risks to the macroeconomy and the financial system given the sector’s close ties to other industries. .

Here’s a summary of analysts’ views on how the problems started, what the impact is, and where the market will go.

 

How the real estate market came to this state

Analysts generally agreed that the current real estate crisis was the culmination of the rapid expansion of many real estate companies through highly leveraged borrowing over the past decades, triggered by a stronger deleveraging campaign by regulators since last year aimed at curbing real estate speculation.

In addition, the increased monitoring by some local governments on the pre-sale income of real estate developers to ensure that they were strictly intended for construction, which led some developers to feel even greater liquidity pressure. Local authorities did so to protect homebuyers from abuse of funds by debt-ridden developers.

• Despite a generally strict real estate policy in recent years, house prices in China have continued to rise, real estate investments have remained strong and the risk of developers’ indebtedness has increased. Therefore, China has announced new property regulation rules since mid-2020, which may have exacerbated the already existing debt problems of some high-leverage developers, including China Evergrande Group.

– UBS Investment Bank

• The real estate sector is caught in a negative credit loop: limited access to finance has reduced liquidity for developers. Developers, especially those who are financially weak, have reduced their spending on land and construction in order to preserve liquidity for debt service. Severely limited access to finance and tight bank control over project-level liquidity for a few financially weak developers limited their ability to manage their cash flow and led them to default. Sales declined across the industry due to limited developer spending and buyers’ concerns about completion risks. The risk aversion of investors and lenders has increased in response, exacerbating the risk of refinancing, especially for small and financially weak developers.

– Moody’s Investor Service

• When regulations were suddenly tightened, the actual cash available to real estate companies would be significantly lower than expected, putting them under liquidity pressure. The stricter the enforcement of pre-sale fund regulations, the greater the pressure on liquidity.

– Essence Securities

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Shock for the Chinese economy

Economists fear that the cooling of the real estate market could slow down China’s recovery from the Covid-19 pandemic, given its significant impact on economic activities, including investment, production and consumer spending. Some have warned of the risks to the financial system, as defaults and possible bankruptcies will lead to an increase in bad debts.

They also warned that some local communities will find it more difficult to make ends meet due to the reluctance of real estate companies to buy land amid the liquidity crunch. Land sales are a key source of finance for local communities, and a drop in sales would weigh on public spending.

• Smaller cities have borne the brunt of the continued deterioration of the real estate sector. The rapid weakening of the real estate sector in October does not bode well for GDP growth and government revenues in the coming months.

– Nomura International (Hong Kong)

• Real estate investment in the first half of next year is likely to decline year over year, which will put obvious pressure on the economy as it is equivalent to 13.5% of GDP. If we take into account its indirect contribution through the increase in services and consumption, the share can exceed 20%.

– TF Securities

• We expect growth of the income of local communities from the sale of land is slowing down overall in 2021 and contract in 2022. Provinces that depend on both land sales and a heavy debt burden will face fiscal pressures and a growing funding gap. The financing gap of local communities will also restrict infrastructure financing, which will weigh on economic growth, intensifying the political dilemma between supporting growth and deleveraging.

– Moody’s Investor Service

• Loans from financial institutions to real estate developers are land-backed, but under downward market pressure, land values ​​may decline, thereby increasing lenders’ bad debt levels. During this time, home buyers may not receive their home in a timely manner. Real estate risks could exacerbate the risks of small and medium-sized businesses along the value chain and even cause a wave of bankruptcies among them, leading to large-scale unemployment.

– China Chengxin international credit rating

What’s next for the real estate industry

Many analysts believe the worst may be yet to come for the Chinese real estate market, as they expect investment, construction and sales to continue to cool in the coming months. Some real estate companies may also continue to struggle to pay their bills.

As regulators have started fine-tuning real estate policies, analysts largely predict that they will continue to ease restrictions on things like issuing mortgages to avoid contagion risks to the economy. But they don’t think there will be a sharp reversal in long-term policy stance to curb real estate speculation.

 

Some economists have said that local governments’ tighter oversight of developers’ presale income could hamper the easing of state departments’ real estate policies, and their limitations on price discounts would be a distortion. Some economists have also said the pilot property tax reform could cause short-term hardship for selected cities.

• We expect the real estate slowdown to be significant but contained. Unlike the start of the 2014-15 housing crisis, the stock of unsold homes weighing on the market is modest. In addition, policymakers have the opportunity to relax policies in the real estate sector to prevent the downturn from becoming too severe. In the medium term, we anticipate a gradual decline in the real estate sector. As a relatively high proportion of empty apartments weighs on the market, we expect urbanization and significant income growth to help reduce the risk of more drastic layoffs.

– Oxford economy

• While we believe Beijing has a much higher pain threshold than in previous tightening cycles, there are still limits to what Beijing is willing to tolerate. Beijing could dramatically step up monetary easing and fiscal stimulus as early as December and January to counter what we expect to increase downward pressures. Beijing could also reduce some of its real estate restrictions. Nonetheless, we expect Beijing to maintain some of the main brakes.

– Nomura International (Hong Kong)

• We forecast a 10% drop in residential sales in 2022. This trend is expected to continue in 2023, where we expect a further 5-10% drop. Lower unit sales and a drop in prices of up to 3% will cause the slowdown. Some local governments are starting to set floor prices on residential sales as regulators seek to stabilize the market.

We believe that regulatory measures restricting borrowing for mortgages and capital for developers will last until at least 2022. The authorities will refine their measures to avoid a drastically negative effect, in our opinion. This can include increasing the availability of mortgages.

– S&P Global

• Policymakers could remain patient for a while, but they would take action later to contain contagion risks in the real estate industry when things go bad enough. For example, they could relax controls on pre-sales money, or change the definition of the three red line regulations. But this is only a fine-tuning of liquidity measures, not a change in policy direction, which would remain with a tightening bias. For the loosening of real estate, policymakers would wait until next year, when they may have to defend the bottom line from 5% GDP growth.

– Macquarie Capital

• Although the real estate market is currently facing great credit risks and liquidity pressure, it is not advisable to be too pessimistic. The change in your policy is underway. While it will take some time for the policy change to be reflected in market indicators, it is quite certain that the market will bottom out next year.

– Citic Securities

• Short-term pain caused by pilot of the property tax reform are inevitable. Although the authorities will proceed with the tax reform cautiously and implement it only gradually, the initiation of the reform would dampen speculation in the market and house prices.

– Nomura International (Hong Kong)

Contact reporter Guo Yingzhe ([email protected]) and editor-in-chief Bertrand Téo ([email protected])

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Penny D. Jackson