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China’s property market in a slump

Date: Feb 10th, 2015

In the first industry-wide move since 2012, the People’s Bank of China (PBoC) cut its reserve ratio requirement (RRR) – the amount of cash banks have to hold as reserves – by 0.5% to 19.5% this month. The easing is likely to provide support in the near-term to China’s slowing economy – and, in-turn, sluggish property market. In this article, we provide an outlook for property in China and more broadly.

What’s been happening?

The sluggish property sector has continued to put downward pressure on economic growth in China. The slump has hit many households and industries, deterring home buyers and lenders, and leading to bankrupt developers and abandoned projects. Adding to the turmoil, some developers are fleecing investors with scams, while legitimate firms are increasingly stretched for cash, leading to elevated lending rates in some cities.

On an annual basis, property prices are down (-3.1% in January versus -2.7% in December) – however, the latest property pricing data shows that the market may be turning, rising by 0.2% and breaking the eight-month streak of price falls.

What the latest lifeline means for the market

The PBoC’s latest move to loosen loan restrictions across the board is likely to encourage banks to step up lending, providing support to the property market and stock prices in the near-term. In November 2014, it also cut interest rates for the first time in more than two years to lower borrowing costs and support growth. Given the structural nature of the property market slowdown, it is fair to say that it will take time for these changes to flow through and take effect.

Expect continued weakness in the short-term

We believe monetary policy will continue to ease incrementally via interest rate cuts and easing of the reserve requirement ratios for all banks. While we saw property inventory levels fall in 2014, and more recently, prices starting to moderate, we expect that overall market conditions will be weak in the short-term. Coming into 2015, we are likely to see some consolidation across the industry, with stronger players set to benefit most based on their economies of scale and efficient business models. The recovery will also be varied across cities and different players.

In terms of government policy, China’s property market is being impacted by:

  • The overseas debt market: This is likely to dictate the recovery in real estate investment as most developers can only fund land acquisitions from actual profits or from borrowing money overseas.

  • More measured objectives: The government maintains a strong focus on applying sound economic management, delivering steady economy growth and avoiding excess capacity. Policy stimulus has been targeted and measured.

  • Credit easing: Mortgage rates have eased, but this has not filtered through the system as widely as many had hoped in order to have a material impact on the sector.

  • Structural reform: With the government appearing intent on achieving its objectives, we expect that anti-corruption will continue to be a factor. This extends to the government wanting to promote more accountability, transparency in real estate activities, which can only be positive for the sector in the long-term.

Divergence: some are doing better than others

Some cities are doing better than others and we believe this is likely to continue. Listed real estate developers are performing a lot better than the unlisted ones. In 2014, listed developers actually increased their sales for the year, at the expense of the unlisted ones which really struggled. We expect that the market share for the top players will continue to increase. Access to credit also differs across markets and individual players. Some companies might be paying high yields on their debt, or even defaulting on real estate related loans, but others are accessing onshore debt at very favourable rates.

What does this mean for investors?

We believe that in the current environment (falling bond yields primarily via monetary easing and low inflation) investors with long-dated liabilities will be looking to find yield from alternate sources. This is supportive of for high-yielding assets with stable income, like property. Bottom-up property fundamentals remain supportive of asset values. Most markets have now passed the worst in the property cycle and rents and occupancy continue to improve globally. Lack of new supply completing due to difficult financing conditions post Global Financial Crisis (GFC), provides added support to existing landlords.

From a global allocation perspective, we favour the US and UK. Growth in the US and UK is accelerating, supported by reasonable activity in the underlying economy. In or view, growth in Asia and core Europe remains at risk as neither region has undertaken the necessary structural reforms since the GFC.

About the Author
Charles Wong, Head of Asian Listed Real Estate, AMP Capital


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