China’s Real Estate Troubles Deepen as Home Sales Decline

Introduction

China’s real estate market is facing accelerating troubles as prospective home buyers hold back on purchases, leading to weak sales and exacerbating the urgent need for government support. This article explores the current state of China’s real estate sector and the challenges developers are facing in raising funds.

Weakening New Home Sales

The top 100 developers in China reported a drop of about a third in new home sales for June and July compared to the previous year, following double-digit growth earlier in the year. This decline in sales is likely to result in significant cash flow issues for developers, as most apartments are sold before they are completed. The situation has been further worsened by the recent default announcement from Country Garden, a leading property developer.

The Impact of Debt Troubles and Government Support

The debt troubles faced by Country Garden and the uncertainty surrounding government support have created unease in the Chinese housing market. Investor confidence has been further shaken by the recent bankruptcy protection filing by Evergrande, the world’s most indebted property developer. These developments add to the pressure on the Chinese economy, which is already experiencing a slowdown.

The “Three Red Lines” Policy

In 2020, Beijing implemented the “three red lines” policy to address the high debt levels of mainland property developers. This policy sets specific balance sheet conditions that developers must meet in order to take on more debt. It focuses on limiting debt in relation to cash flow, assets, and capital levels. Evergrande’s default in late 2021 highlighted the impact of these regulations.

Country Garden’s Troubles

Country Garden’s default could contribute $9.9 billion to the global emerging markets high-yield corporate default tally for the year. JPMorgan predicts that the Chinese property sector will account for nearly 40% of all emerging market default volumes in 2023. Much of Country Garden’s issues stem from its significant exposure to less developed areas of China, where housing supply exceeds demand.

Challenges in Real Estate Sales

Country Garden’s sales performance has been disastrous, with June and July sales dropping by about 50% compared to the previous year. Lower-tier cities started experiencing sales weakness in May, while higher-tier cities saw a decline in subsequent months. As a result of these challenges, it is becoming increasingly difficult for China’s overall real estate sales to reach projected targets.

Government Response and Policy Adaptation

China’s top leaders have vowed to adjust and optimize policies in a timely manner to support the property sector. However, they have yet to provide clear plans to address the changing dynamics in the market. The uncertainty surrounding government support and the debt troubles faced by developers are fueling broader unease in the Chinese housing market.

Land Sales Divergence

In the midst of the debt and credit challenges facing the property sector, state-owned developers are in a better position to grow compared to non-state developers. State-owned developers have seen a 48% increase in contracted sales, while non-state developers have experienced a 19% decline. This divergence is allowing state-owned developers to purchase land from local governments, as their robust sales boost cash flow.

Future Outlook and Policy Clarity

While non-state developers have had leverage problems in the past, the prevalence of state-owned developers in the industry may make it challenging to accurately forecast demand. Nonetheless, there is still underlying housing demand in first-tier cities that remains resilient and untapped. Timely policy interventions to stabilize demand and sales in these cities will be crucial for the overall stability of the market and the eventual spillover to lower-tier cities.

Source: AsumeTech