China property stocks surged amid warnings of weak reality, high expectations

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Despite its rules-based system, a lot weighs on China: World Bank

According to Goldman Sachs analysis of official data, China’s real estate prices fell in October mainly due to falling prices in less developed, so-called Tier 3 cities.

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BEIJING – China’s real estate sector is not yet ready for a quick recovery, despite a rally this month in shares of major real estate developers.

That’s because recent support from Beijing doesn’t directly solve the main problem of falling home sales and prices, analysts say.

Last week, real estate developer stocks rose after it was revealed that the central bank and banking regulators had enacted measures encouraging banks to help the real estate industry. It comes along with other support measures earlier this month.

shares of country gardenthe largest Chinese developer by revenue, more than doubled in November, and those of long after have increased by about 90%. The shares have already given up part of this month’s gains.

Meanwhile, iron ore futures are up about 16% this month — analysts at Morgan Stanley say about 40% of China’s steel consumption is used in real estate construction.

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

Sheng said it is important to monitor whether apartments can be completed and delivered during the peak construction period in March and April.

This is really a temporary relief as the developers will have less debt to pay off in the near future…

The new measures, which have been widely publicized in China but not officially released, provide for loan extensions, require equal treatment for developers regardless of whether they are state-owned or not, and support bond issuance. Neither regulator responded to CNBC’s request for comment.

“This is really a temporary relief in terms of developers having fewer debt repayment requirements in the near future – more of a temporary liquidity relief than a fundamental turnaround,” said Hong Kong-based analyst Samuel Hui, director, Asia-Pacific Corporates, The shared Fitch Ratings on Wednesday.

“The key is that we still have to improve the fundamental underlying home sales market,” he said, noting that homebuyer confidence depends on developers being able to complete the construction and delivery of homes.

Earlier this year, many homebuyers refused to continue paying mortgages on apartments when construction was delayed. Homes in China are typically sold before completion, which is an important source of income for developers.

A lengthy recovery

Analysts are divided on when the Chinese real estate market can recover.

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

“If this policy is implemented in a timely manner, the downward spiral to developers will be stopped, which will help restore investor confidence [in] the developers,” he said.

Residential home sales fell 28.2% year over year in the first 10 months of the year, the National Bureau of Statistics said last week. S&P Global Ratings said in July that it expects sales to fall 30% in 2022, worse than 2008 when sales fell about 20%.

A slowdown in economic growth, uncertainty about ongoing Covid controls and worries about future earnings have dampened appetite for home buying.

In addition, prices are falling.

House prices in 70 cities fell 1.4% in October from a year earlier, according to Goldman Sachs analysis of data released Wednesday.

“Despite further local measures to ease housing construction in recent months,” the analysts said, “we believe real estate markets in lower cities still face strong headwinds from weaker growth fundamentals than in large cities, including net emigration and potential oversupply issues.”

According to the report, house prices in the largest Tier 1 cities rose 3.1% in October from September, while Tier 3 cities saw a 3.9% decline over the period.

About two years ago, Beijing began cracking down on developers’ high reliance on debt for growth. The country’s most indebted developer, Evergrande, fell into a high-profile debt crisis late last year that shook investor confidence.

Concerns about the ability of other real estate companies to repay their debt have since spread to once-healthy developers.

Trading in Evergrande, Kaisa and Shimao shares remains suspended.

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While Covid controls have stunted China’s growth this year, struggles in the housing market have also been a major contributor.

According to analyst estimates, the real estate sector, including related industries, accounts for about a quarter of China’s GDP.

“I think the real estate sector will weigh less on the economy in 2023,” said Tommy Wu, senior China economist at Commerzbank AG, on Wednesday.

“It’s too early to say if the measures put in place so far will be enough to save the real estate sector,” he said. “But it feels safer now because it seems more likely that more vigorous measures will be put in place if the real estate downturn still doesn’t make itself felt in the coming months.”

A longer-term transformation

Ultimately, China’s real estate industry is undergoing a state-led transformation — towards a smaller slice of the economy and a business model that relies far less on selling homes before completion.

According to S&P’s Lu, the housing market has shrunk by about a third year-on-year and is expected to stay the same size next year.

State developers have fared better during the downturn, he stressed.

In the first three quarters of the year, Lu said revenue from state-owned developers fell 25%, compared with a 58% drop in revenue from non-state-owned developers.

And despite recent policy moves, Beijing’s stance of discouraging large-scale home buying remains.

Whether they’re communications from the National Bureau of Statistics or the People’s Bank of China, official announcements this month reiterated that homes are for living, not speculation — the mantra that marked the early beginnings of the housing market slump.