China property stocks surged. Analyst warns of high expectations, weak reality

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China’s housing prices fell in October due primarily to falling prices in less developed, so-called Tier-3 cities, according to Goldman Sachs analysis of official data.

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BEIJING — China’s real estate sector isn’t yet poised for a quick recovery, despite a rally this month in stocks of major property developers.

That’s because recent support by Beijing don’t directly resolve the main problem of falling home sales and prices, analysts say.

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Last week, property developer stocks surged after news the central bank and banking regulator issued measures that encouraged banks to help the real estate industry. It comes alongside other support measures earlier this month.

Shares of Country Garden, the biggest Chinese developer by sales, have more than doubled in November, and those of Longfor have surged by about 90%. The stocks have already given back some of this month’s gains.

Meanwhile, iron ore futures surged by about 16% this month — Morgan Stanley analysts say about 40% of China’s steel consumption is used in property construction.

The situation is one of “strong expectations, but weak reality,” and market prices have deviated from the fundamentals, Sheng Mingxing, ferrous metals analyst at Nanhua Research Institute, said in Chinese translated by CNBC.

Sheng said it’s important to watch whether apartments can be completed and delivered during the peak construction period of March and April.

This really is a temporary relief in terms of the developers having to meet less debt repayment needs in the near future — a temporary liquidity relief rather than a fundamental turnaround.

The new measures, widely reported in China but not officially released, stipulate loan extensions, call for treating developers the same whether they are state-owned or not and support bond issuance. Neither regulator responded to CNBC’s request for comment.

“This really is a temporary relief in terms of the developers having to meet less debt repayment needs in the near future — a temporary liquidity relief rather than a fundamental turnaround,” Hong Kong-based analyst Samuel Hui, director, Asia-Pacific corporates, Fitch Ratings, said Wednesday.

“The key is that we still need the fundamental underlying home sales market to improve,” he said, noting homebuyer confidence relies on whether developers can finish building and delivering apartments.

Earlier this year, many homebuyers refused to continue paying mortgages on apartments when construction was delayed. Homes in China are typically sold ahead of completion, generating a major source of cash flow for developers.

A drawn-out recovery

Analysts differ on when China’s property market can recover.

Fitch said a timeline “remains highly uncertain,” while S&P Global Ratings’ Senior Director Lawrence Lu expects a recovery could occur in the second half of next year.

“If this policy is implemented promptly, this will stop the downward spiral to the developers, this will help to restore the investors’ confidence [in] the developers,” he said.

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While Covid controls have dragged down China’s growth this year, the real estate market’s struggles have also contributed significantly.

The property sector, including related industries, accounts for about a quarter of China’s GDP, according to analyst estimates.

“I think the real estate sector will become lesser of a drag to the economy in 2023,” Tommy Wu, senior China economist at Commerzbank AG, said Wednesday.

“It is too early to tell whether the measures rolled out so far will be enough to rescue the real estate sector,” he said. “But it feels more assuring now because it seems more likely that more forceful measures will be rolled out if the real estate downturn still doesn’t turn around meaningful in the coming months.”

A longer-term transformation

Ultimately, China’s real estate industry is undergoing a state-directed transformation — to a smaller part of the economy and a business model far less reliant on selling apartments before they’re completed.

The property market has shrunk by roughly one-third compared to last year, and will likely remain the same size next year, S&P’s Lu said.

State-owned developers have fared better during the downturn, he pointed out.

In the first three quarters of the year, Lu said sales by state-owned developers fell by 25%, compared to the 58% sales decline for developers not owned by the state.

And despite recent policy moves, Beijing’s stance remains firm in dissuading home purchases at scale.

Whether it’s messaging from the National Bureau of Statistics or the People’s Bank of China, official announcements this month reiterated that houses are for living in, not speculation — the mantra that marked the early beginnings of the real estate market slump.



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