High-rise buildings are illuminated at night in the West Coast New Area of Qingdao, east China's Shandong Province, March 22, 2024.
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BEIJING – China's real estate woes are likely far from over and industry issues need to be addressed quickly if overall GDP growth is to pick up significantly, according to a report released Thursday by global investment firm KKR.
That's one of the two key takeaways from a recent trip to China by the firm's head of global and macroeconomic asset allocation, Henry H. McVey. It was his fourth visit in just over a year.
“A fundamentally overbuilt real estate industry must be addressed – and quickly,” he said in the report, which includes Changchun Hua, KKR's chief economist for Greater China, as co-authors.
“Secondly, confidence needs to be restored to bring savings back down,” McVey said, noting that this would encourage consumers and businesses to spend on switching to higher quality products, as Chinese authorities have encouraged.
Depending on the extent of analyst calculations, real estate and related sectors once accounted for about a fifth or more of China's economy. The real estate industry has slumped in recent years after Beijing cracked down on developers' heavy reliance on debt for growth.
Based on comparisons with real estate corrections in the US, Japan and Spain, China's “real estate market correction may only be halfway complete in terms of depth,” the KKR report said.
“Both price and volume must come under pressure to complete the cleansing cycle,” the report said. “However, so far it has largely been a volume decline.”
While KKR's report didn't provide much detail on expectations for specific real estate policies, the authors said further actions by Beijing to improve China's real estate sector “could significantly change investor perceptions.”
Amid geopolitical tensions, the collapse of the real estate market and decline in stock holdings have prompted many foreign institutional investors to consider investing in China.
“According to some of our proprietary surveys, many allocators have considered reducing China exposure to 5-6% from 10-12% today, at a time when we believe the economic fundamentals have likely bottomed out.” , says the KKR report.
Much of the official Chinese data at the start of the year exceeded analysts' expectations.
Chinese officials said the real estate sector remains in a period of adjustment as Beijing shifts its focus to manufacturing and what it sees as “high-value development.”
Authorities have also released guidelines to encourage financial support for select real estate developers, while many local governments – although not necessarily the largest cities – have significantly eased restrictions on home purchases.
The burden of real estate is moderate
KKR expects China's GDP growth to slow slightly to 4.7% this year and 4.5% next year, with real estate and Covid-related factors increasing its drag on the economy from 1.4 percentage points in 2024 to 0. 7 percentage points will be halved in 2025.
“Our conclusion is: with progress [property] We believe a correction, as well as possible further policy support, will be a drag [the] “The overall economy is expected to weaken somewhat over the next few years,” McVey said in a separate statement. He is also the Chief Investment Officer of KKR Balance Sheet.
Catering, accommodation and wholesale trade are expected to increase their contribution to growth slightly over the next two years, while digitalization and the shift towards a more carbon-neutral, green industry are likely to remain the biggest growth drivers, the report says.
For investors, the report said a more important development than China's GDP growth was whether authorities could make it easier for companies and households to access capital markets.
“Repairing vulnerabilities in [the] “The economy, particularly in housing, will ultimately drive down the cost of capital and also allow new consumer companies to access capital markets likely at better prices as real estate and confidence perform better,” McVey said in the statement.
Beijing announced in March a GDP target of around 5% for this year. Housing and Urban-Rural Development Minister Ni Hong said last month that developers should go bankrupt if necessary and that authorities would encourage the development of affordable housing.
Recent data suggests some stabilization of the slowdown in the real estate sector. According to Nomura, citing Wind Information, the seven-day rolling average of new home sales in 21 major cities fell 34.5% year over year on Monday, better than the 45.3% decline a week earlier.
Compared to the same period in 2019, that average sales fell just 27.8% on Monday, compared with a 47% decline a week earlier, Nomura said, noting that most of the improvement was in the largest cities of China.
Consumer outlook
KKR said most of its local portfolio lies in consumer and services companies whose businesses reflect how middle- to upper-income Chinese spend modestly to improve their lifestyles.
“Sales growth is solid, margins are holding up and consumers are spending on less flashy things like 'smart homes', pets and leisure activities,” the report said. “Domestic traffic is also strong.”
Retail sales rose a better-than-expected 5.5% in January and February from a year earlier, driven by a significant increase in spending for the Lunar New Year holiday.
In the longer term, KKR continues to believe that China can follow historical precedent and change its policies to be more “investor-friendly.”
“While our message is not an all-clear signal to give in,” the report says, “it is a reminder – taking our cue from history – that as China adopts domestic policies to become more investor-friendly (especially , because it … refers to supply-side reforms), this market could recover significantly from current levels.”