China’s New Property Policies Moving in Right Direction

  • China's new property policies head in the right direction, effects need months to assess
  • Encouraging the repurposing of completed but unsold property units through a RMB 300 billion affordable housing refinancing facility
  • Improved credit of leading developers present investment opportunities, aided by Banks' project loans and guaranteed bond programs

In May, China rolled out historic steps aimed at reviving its real estate market. Although specifics have yet to be unveiled, BEA Union Investment believes the worst may have passed. Some leading developers have already witnessed stabilisation in their credit fundamentals following earlier initiatives. But for earnings to recover will require a meaningful rebound in both sales and prices. While property support measures implemented thus far are a step in the right direction, it will likely take some time to see results. This is why our investment teams maintain a cautious stance towards Chinese property stocks.

In early May, Hangzhou and Xi'an lifted all restrictions on home purchases. Shortly after, the PBoC abolished the floor on mortgage interest rates nationwide and lowered the minimum down-payment ratios for first-time homebuyers to 15% from 20%, and for second-home purchases to 25% from 30%. The central bank also set up a RMB300 billion refinancing loan facility for affordable housing, encouraging local state-owned enterprises to purchase unsold homes. Details regarding the scale, implementation plan, and timetable remain unclear, but we anticipate more details to emerge during the third plenary session in July.

The Top 100 developers in China saw contracted sales rising 3.4% in May from the previous month and down 34% from the previous year, a narrower decline than the 45% annual drop in April. As of end-April, completed yet unsold residential inventory nationwide amounted to about 391 million square metres, up 24.5% from the previous year.

To revitalise the real estate sector, we believe buyer confidence needs to be restored, a task that remains unfulfilled given China's economy is still undergoing a structural transformation. Our investment teams believe substantial recovery in sales and prices are necessary before earnings can be improved. Hence, we incline to remain cautious towards Chinese property stocks for now, pending further clarity. Measures launched so far are moving in the right direction, but actual implementation could be an uphill battle when local governments are already laden with debt. Official data showed local government debt reached about RMB40.74 trillion as of end-2023. Hence, motivating local authorities to expand their share in low-returning subsidised homes will be no easy feat. Banks, too, will need to assess their risks when extending loans to potentially unprofitable entities. We believe the effectiveness of these new policies will require monitoring over the coming months. If current measures prove inadequate, the authorities may then consider alternative approaches.

Support measures boost credit profiles of some Chinese developers

Over the past two decades, China's property sector has been a cornerstone of its economic growth, contributing about 17% of the nation's GDP when accounting for related industries. During the pandemic, cash-strapped Chinese developers struggled to complete sold property projects. Many buyers, frustrated by delays, subsequently suspended their mortgage payments, exacerbating developers' financial woes. This situation plunged the industry into a vicious cycle, with China's real estate sector turning sour starting 2021.

Since then, the authorities have taken steps to stabilise the housing market. Banks, for instance, have provided financially sound developers with refinancing options through project loans or guaranteed bonds backed by collaterals. These policies have bolstered the credit qualities of leading property developers, creating investment opportunities in bonds issued by developers that are direct beneficiaries of these measures. These include developers with Investment Grade ratings, state-owned enterprise developers or developers that receive backing by local state-owned Assets Supervision and Administration Commission of the State Council (SASAC), and developers with sufficient investment property assets eligible as collaterals. In addition, High Yield property bond issuers demonstrating progress in external financing of restructuring are also on our radar.