China property set for modest demand recovery in 2023 on policy support

Midea Real Estate Holding

05/01/2023 23:00

By Clare Jim, Xie Yu and Rae Wee
       HONG KONG, Jan 6 (Reuters) - 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  .HSPMI 
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  .IBXXAX13  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."
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
GRAPHIC-China property sector slump    https://tmsnrt.rs/3IoWcp2
GRAPHIC-Dwindling liquidity in China's property sector    https://tmsnrt.rs/3Ger3Sn
GRAPHIC-China real estate dollar bonds maturing in 2023    https://tmsnrt.rs/3Zdx0HN
GRAPHIC-China's falling home prices    https://tmsnrt.rs/3Zaj8xX
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 (Editing by Sumeet Chatterjee and Kim Coghill)
 ((clare.jim@thomsonreuters.com;))