Analysis: China's home de-stocking push to bring developers little cheer

China Jinmao Holdings

10/06/2024 24:04

By Clare Jim and Ziyi Tang
       HONG KONG/BEIJING, June 10 (Reuters) - China's efforts
to clear massive inventory by turning unsold homes into
affordable housing are unlikely to help cash-strapped developers
due to the programme's limited size and potentially low prices,
analysts and developers say.
    As part of a support package for the crisis-hit property
sector, Beijing announced last month a plan for a 300 billion
yuan ($41 billion) lending facility, which could result in 500
billion worth of bank financing for local state-owned
enterprises (SOEs) to purchase completed and unsold homes.
    Chinese banks are expected to extend cheaper loans to SOEs
via the facility, backed by the central bank, to help them buy
the homes from developers at "reasonable prices" to turn into
affordable housing.
    Some private developers, however, see very few, if any, of
their projects being selected as the lending facility is
inadequate and the scheme is only expected to launch in bigger
cities where affordable housing is available. Price offers from
SOEs are also likely to be low, they say.
    The cautious attitude of developers could be a challenge for
Beijing, as waves of support measures over the past two years
fail to revive the sector, which at its peak accounted for a
quarter of GDP and remains a major drag on the economy.    
    Xintangzhen, a town in Guangzhou, issued a notice on May 30,
the first local government to do so after the support package,
to purchase "suitable housing stock" for resettlement housing.
    The local government would buy the homes at cost price,
reported China Real Estate Business, a media outlet managed by
the housing authority, citing the notice.
    A project co-owned by state-owned Jinmao  0817.HK  and major
developer Vanke  000002.SZ  had applied, the news report added. 
    Some developers said buying at costs, which means a 20-30%
discount to market price, was better than expected.    
    A senior executive at a private developer in default said
his firm would be interested to apply if other cities make
similar offers as Xintangzhen, but he expects offers to be low
and insufficient to cover construction loans.  
        "If it's not even enough to cover the development loan,
how do we repay the loan? The lending bank would not agree
either," said a senior official at a Shanghai-based developer,
who declined to be identified due to the sensitivity of the
matter.
    Analysts at Citi and Bank of America have, however, said
discounts of 50% in prices are needed to ensure modest returns
for the SOEs, as affordable homes typically sell at 10-50%
discounts to private homes.  
    Even if developers are able to profit from selling completed
apartments to the SOEs, local governments may require proceeds
be used to finish existing projects rather than to repay debt. 
    "This will not help us as a listed company, or our offshore
debt repayment," said an executive at another developer in
credit default.
        Gavekal Dragonomics estimates that at average market
prices, 500 billion yuan in purchases would pay for 12% of
housing inventories, or 20% if bought at a discount.  
    S&P said that converting existing inventory into social
housing would also increase transactions at the low-end and
bring down overall prices.   
    China's housing ministry, central bank, the top banking
regulator and local housing authority in Guangzhou did not
respond to requests for comment. Jinmao did not respond to a
request for comment and Vanke declined to comment.
    
    EXECUTION RISK
    "Only a handful of distressed developers will benefit," said
S&P Global Ratings credit analyst Esther Liu. "(Completing
construction) is the problem the distressed developers are
facing. They don't have a lot of completed inventory."
    While developers await clarity on SOE demand and price
offers, some bankers say the affordable housing scheme could
lead to a deterioration in asset quality as SOEs would struggle
to generate sufficient profits to repay bank loans.
    Banks can borrow from the 300 billion re-lending facility at
1.75% interest to finance 60% of the loans they offer to SOEs. 
    In aggregate, analysts estimate, that SOEs would have to pay
around 2.5% interest for these loans, similar to average rental
yields in China.
    "This is good for the property sector but bad for the SOEs
and the banks, because essentially you're shifting some risk to
them," said the first executive, who declined to be named as he
is not authorised to speak to the media.
    To be sure, banks and local governments are risk averse.
    The central bank in February last year rolled out a 100
billion yuan re-lending programme for local governments in eight
cities to purchase home inventories - only 2 billion of which
has been utilised as of end-March 2024.
    "We see high execution risk given banks and local SOEs have
to fully bear the credit and investment risks," said Zerlina
Zeng, senior credit analyst at CreditSights.
    The central government's support though has drawn more
visitors to top-tier cities following the latest stimulus
package that includes lowering down payment and removal of
mortgage rate floors, analysts and developers say.
    "The central government has stepped up (support); the
turning point is the important change here," said Bank of
America head of Greater China property research Karl Choi.

($1 = 7.2455 Chinese yuan)

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EXPLAINER-Key features of China's affordable housing policy   
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 (Reporting by Clare Jim in Hong Kong and Ziyi Tang in Beijing;
Editing by Sumeet Chatterjee and Jacqueline Wong)
 ((clare.jim@thomsonreuters.com;))