China property stocks surged amid warnings of weak reality, high expectations

BEIJING — China’s actual property sector is not but poised for a fast restoration, regardless of a rally this month in stocks of main property builders.

That is as a result of latest assist by Beijing do not instantly resolve the primary downside of falling house gross sales and costs, analysts say.

Final week, property developer stocks surged after information the central financial institution and banking regulator issued measures that inspired banks to assist the actual property business. It comes alongside different assist measures earlier this month.

Shares of Nation Backyard, the most important Chinese language developer by gross sales, have greater than doubled in November, and people of Longfor have surged by about 90%. The stocks have already given again some of this month’s positive aspects.

In the meantime, iron ore futures surged by about 16% this month — Morgan Stanley analysts say about 40% of China’s metal consumption is utilized in property development.

The state of affairs is one of “strong expectations, but weak reality,” and market costs have deviated from the basics, Sheng Mingxing, ferrous metals analyst at Nanhua Analysis Institute, mentioned in Chinese language translated by CNBC.

Sheng mentioned it is necessary to look at whether or not residences might be accomplished and delivered throughout the peak development interval of March and April.

The brand new measures, broadly reported in China however not formally launched, stipulate mortgage extensions, name for treating builders the identical whether or not they’re state-owned or not and assist bond issuance. Neither regulator responded to CNBC’s request for remark.

“This really is a temporary relief in terms of the developers having to meet less debt repayment needs in the near future — a temporary liquidity relief rather than a fundamental turnaround,” Hong Kong-based analyst Samuel Hui, director, Asia-Pacific corporates, Fitch Scores, mentioned Wednesday.

“The key is that we still need the fundamental underlying home sales market to improve,” he mentioned, noting homebuyer confidence depends on whether or not builders can end constructing and delivering residences.

Earlier this 12 months, many homebuyers refused to proceed paying mortgages on residences when development was delayed. Properties in China are usually bought forward of completion, producing a significant supply of money movement for builders.

A drawn-out restoration

Analysts differ on when China’s property market can recuperate.

Fitch mentioned a timeline “remains highly uncertain,” whereas S&P World Scores’ Senior Director Lawrence Lu expects a restoration may happen within the second half of subsequent 12 months.

“If this policy is implemented promptly, this will stop the downward spiral to the developers, this will help to restore the investors’ confidence [in] the developers,” he mentioned.

Residential housing gross sales for the primary 10 months of the 12 months dropped by 28.2% from a 12 months in the past, the Nationwide Bureau of Statistics mentioned final week. S&P World Scores mentioned in July it expects a 30% plunge in gross sales for 2022, worse than in 2008 when sales fell by about 20%.

A slowdown in economic growth, uncertainty about ongoing Covid controls and worries about future income have dampened appetite for buying homes.

Adding to those worries are falling prices.

Housing prices across 70 cities fell by 1.4% in October from a year ago, according to Goldman Sachs analysis of data released Wednesday.

“Despite more local housing easing measures in recent months,” the analysts said, “we believe the property markets in lower-tier cities still face strong headwinds from weaker growth fundamentals than large cities, including net population outflows and potential oversupply problems.”

The report said housing prices in the largest, tier-1 cities rose by 3.1% in October from September, while Tier-3 cities saw a 3.9% drop during that time.

About two years ago, Beijing began to crack down on developers’ high reliance on debt for growth. The country’s most indebted developer, Evergrande, defaulted late last year in a high-profile debt crisis that rattled investor confidence.

Worries about other real estate companies’ ability to repay their debt have since spread to once-healthy developers.

Trading in shares of Evergrande, Kaisa and Shimao is still suspended.

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While Covid controls have dragged down China’s growth this year, the real estate market’s struggles have also contributed significantly.

The property sector, including related industries, accounts for about a quarter of China’s GDP, according to analyst estimates.

“I think the real estate sector will become lesser of a drag to the economy in 2023,” Tommy Wu, senior China economist at Commerzbank AG, said Wednesday.

“It is too early to tell whether the measures rolled out so far will be enough to rescue the real estate sector,” he said. “But it feels more assuring now because it seems more likely that more forceful measures will be rolled out if the real estate downturn still doesn’t turn around meaningful in the coming months.”

A longer-term transformation

Ultimately, China’s real estate industry is undergoing a state-directed transformation — to a smaller part of the economy and a business model far less reliant on selling apartments before they’re completed.

The property market has shrunk by roughly one-third compared to last year, and will likely remain the same size next year, S&P’s Lu said.

State-owned developers have fared better during the downturn, he pointed out.

In the first three quarters of the year, Lu said sales by state-owned developers fell by 25%, compared to the 58% sales decline for developers not owned by the state.

And despite recent policy moves, Beijing’s stance remains firm in dissuading home purchases at scale.

Whether it’s messaging from the National Bureau of Statistics or the People’s Bank of China, official announcements this month reiterated that houses are for living in, not speculation — the mantra that marked the early beginnings of the real estate market slump.

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