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China’s deeply troubled property sector is set to see home sales fall for the second straight year in 2023, but the pace of declines will ease thanks to state support measures and the lifting of the government’s strict anti-Covid policies.
Property sales are expected to slip by a median of 8% this year, a Reuters survey of eight economists and analysts showed, compared to a slump of around 25% in 2022, as economic activity, household income and consumer confidence are seen rebounding in the second half.
Economists and analysts believe policymakers will roll out more support measures to stimulate home demand this year, as part of Beijing’s overall goal to bolster the $17-trillion economy after a sharp Covid-induced downturn in 2022.
Those policies could include further lowering of mortgage borrowing rates and down-payment requirements, as well as relaxing home purchase restrictions in top-tier Chinese cities, they added.
Hopes of a pickup in the economy later this year have been fuelled by China’s dismantling in December of its stringent zero-Covid policy, which likely dragged GDP growth down to just 3% last year, one of its worst years in almost half a century.
But the reversal has triggered a wave of Covid infections, which are expected to cause further economic disruptions and strain households for at least a few more months.
Mortgage revolt
China’s property sector, which accounts for a quarter of the economy, was badly hit last year as cash-squeezed developers were unable to finish apartment construction, prompting a mortgage boycott by some buyers. Citywide lockdowns to control the pandemic and layoffs also weighed heavily on buyer sentiment.
Property investment in November fell the fastest since the statistics bureau began compiling data in 2000, down 19.9% on year.
“For 2023, we expect a sequential rebound in both sales and property new starts, as property policies continue to ease, and re-opening after Covid leads to a rebound in economic activity and household income,” said UBS chief China economist Tao Wang.
“Although property sales and starts will likely be slightly weaker than in 2022, property will be much less of a drag on the economy than in 2022.”
There are some early signs of a turnaround.
New-home sales rose more than 20% over the three-day New Year holiday from a year-ago due to promotions, support policies and the gradual release of pent-up demand after high Covid-19 cases, the China Index Academy said this week.
The academy said major cities such as Beijing and Shanghai saw a rise in sales compared with last year’s New Year holiday, but sentiment remained at low levels in most small cities.
Housing demand
Shares in embattled Chinese property developers have gained 86% since the trough in October, buoyed by a string of property easing measures and the Covid policy u-turn.
An index tracking high-yield dollar bonds of Chinese developers has more than doubled from its Nov. 3 low, but is still 30% lower than the beginning of this year, and 58% lower than its peak in May, 2021 after a series of defaults.
“I think the market has been ruthlessly efficient in repricing the positive policy noises that have come through,” said Tim Gibson, co-head of global property equities at Janus Henderson Investors.
“In terms of what the market needs to see, I think that really goes back to the point on the demand side.”
Gavekal Dragonomics expects a rise of 5%-10% in property sales this year, while Citi has forecast a 21% drop, citing time needed for job and home price expectations to recover, as well as a drop in new supply.
Sheldon Chan, a Hong Kong-based portfolio manager of T. Rowe, said there’s chance that the property recovery “may be slower than that the market seems to be pricing or potentially pricing”.
“We may be close to see some bottoming out in housing demand …but I don’t think we’re quite there yet,” he said.
The latest China Beige Book private economic survey was more blunt: “But forget a return to days of old: it will take considerable policy support in 2023 just to pull property out of the gutter.”
Dollar bond market
Despite hopes of a modest improvement in home demand this year, the sector’s recovery is expected to be a long and bumpy one, still weighed down by excesses of the past.
Many developers are expected to struggle to significantly ease their stifling funding squeeze, weighing on their ability to purchase new land and repay offshore creditors.
For many private developers, being absent from the land market last year also means they may have fewer projects for sale in 2023, in turn constraining their cash flow.
Moreover, 2023 will see a high offshore debt maturity wall totalling $141 billion, compared to $120.7 billion in 2022, data by Refinitiv show. The figure represents the amount at issue and does not reflect redemptions and defaults.
Providing good quality and unpledged asset collateral is the biggest challenge for developers in both raising domestic bonds and obtaining offshore bank loans, in which proceeds can be used for offshore repayments, three developers told Reuters, speaking on condition of anonymity because the issue is sensitive to regulators.
As a result, Cosmo Zhang, credit analyst at Vontobel Asset Management, said the sector would see more debt restructuring.
“There are still a few names we think, even if they haven’t defaulted yet, they probably still need to restructure their capital structure in the coming years, to be sustainable. Their capital structure is not sustainable.”
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