China’s real estate problems are worsening, and calls are growing for bolder political aid

  • New home sales of China’s 100 largest developers fell by about a third in June and July last year, after double-digit growth earlier in the year, according to S&P Global Ratings.
  • Late Thursday, the world’s most indebted real estate developer Evergrande filed for bankruptcy protection in the United States, shaking investor confidence.
  • A looming default for Country Garden is making it difficult for real estate developers to raise funds, adding to contagion fears in China’s real estate sector.

An aerial photo shows a rural residential area in Chengdong Township, Hai’an City, east China’s Jiangsu Province, April 1, 2023.

Publishing in the future | Publishing in the future | Getty Images

China’s real estate problems are accelerating. Potential home buyers are holding back, resulting in weak sales that compound the urgent need for policymakers to increase support for the industry.

New home sales for the top 100 developers fell by about a third in June and July last year, after double-digit growth earlier in the year, said Edward Chan, a principal at S&P Global Ratings. With most apartments in China sold out before completion, weak new home sales are likely to lead to major cash flow problems for developers.

“We think the situation is probably getting worse because of the Country Garden incident,” Chan told CNBC in a phone interview Thursday. He added that he had not noticed any improvement in new home sales so far.

While a slew of data points to a rapid slowdown in the economy, this lack of improvement, coupled with a looming default in Country Garden, is making it difficult for real estate developers to raise cash.

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Late Thursday in the United States, the world’s most indebted real estate developer Evergrande filed for bankruptcy protection, shaking investor confidence.

The deepening crisis of confidence is adding pressure to the world’s second largest economy.

Country Garden’s debt problems and uncertainty about broader government support is feeding into anxiety in the Chinese housing market.

Louise Low

Oxford Economics

China’s real estate sector has been reeling since 2020, when Beijing cracked down on the debt levels of mainland property developers.

Years of explosive growth led to the building of ghost towns as supply outpaced demand as developers looked to capitalize on the appetite for homeownership and invest in real estate.

These measures, known as China’s “three red lines” policy, refer to three specific balance sheet conditions that developers must meet if they want to take on more debt.

The rules require developers to limit their debt in relation to the company’s cash flow, assets and capital levels, with debt-laden developer Evergrande first defaulting in late 2021.

JP Morgan said in a note that a default by Country Garden could add $9.9 billion to the global emerging market default tally year-to-date, bringing the total default size of China’s real estate sector to $17 billion so far in 2023. On date Aug 15th.

The US investment bank expects Chinese real estate to account for nearly 40% of all default volumes in emerging markets in 2023.

Much of Country Garden’s problems relate to its huge exposure to less developed parts of China known as lower class cities. About 61% of projects are by company 2022 Annual Reportin these lower-tier cities, where housing supply exceeds demand.

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“Country Garden’s sales performance was kind of disastrous,” said S&P Global’s Chan, noting that sales in June and July fell about 50% year-over-year.

Lower-tiered cities began to see sales weaken in May, Chan said, while higher-tier cities began to see sales deteriorate in subsequent months.

As a result of Country Garden’s woes, Chan said it’s “becoming more and more difficult” for China’s total real estate sales to reach core S&P status from 12 trillion yuan to 13 trillion yuan this year.

“Instead of an L-shape it could be a descending ladder,” he said.

Chan said Standard & Poor’s issue of China’s real estate sector is 11 trillion yuan in sales this year, and 10 trillion yuan for 2024.

That’s still roughly half of what the country’s property market sales were at its peak in 2021 — at 18 trillion yuan, according to figures shared by Chan.

At the mid-year economic review meeting in July, China’s top leaders pledged to “timely adjust and improve policies” for the beleaguered real estate sector.

So far, they have not clearly demonstrated their plan to adapt to the “major changes” in the dynamics of supply and demand in the real estate market.

“Country Garden’s debt problems and uncertainty about government support is feeding into broader anxiety in the Chinese housing market,” Louise Law, chief economist at Oxford Economics, wrote in a note dated Aug. 11.

With China’s real estate sector consolidating amid the debt and credit crisis, state-owned developers are better positioned to grow than non-state developers.

State-owned developers saw contract sales grow 48% in the first seven months of this year compared to a year ago, while non-state developers saw sales drop 19%, according to data from Natixis Corporate and Investment Banking.

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This enhances the ability of state-owned developers to buy land from local governments because strong home sales boost cash flow.

“At present, 87% of land purchases are sold [state-owned enterprises]How do you expect [privately owned enterprises] To increase growth? Gary Ng, chief economist at Natixis, said in a phone interview on Tuesday.

Natixis data showed that 87% of land purchases by value for the year through July were by state-owned developers, similar to last year. The data showed that this is up sharply from 59% in 2021.

Ng expects state-owned developers to have more ownership in the Chinese real estate market in the future. But he said that while non-state developers have had leverage problems in the past, having so many state-owned developers in the industry can make it difficult to predict actual demand.

However, underlying housing demand in first-tier cities remains fairly resilient and untapped, and may be released once there is greater clarity in policies.

“A timely policy to stabilize demand and sales in higher-level cities will be very important,” said Chan of S&P Global.

“If this can be achieved over time, stabilization can be extended to lower-tier cities. But that will take longer.”

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