Chinese real estate stocks rose amid warnings of weak reality and high expectations

According to analysis of official data from Goldman Sachs, Chinese home prices fell in October mainly due to falling prices in less developed cities, the so-called Tier-3 cities.

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

That’s because Beijing’s recent backing doesn’t directly address the core problem of falling home sales and prices, analysts say.

Shares of property developers surged last week after news that the central bank and banking regulator issued measures that encouraged banks to help the real estate sector. It joins other support measures earlier this month.

Shares of Country gardenthe largest Chinese developer by sales, more than doubled in November, and those of To desire have increased by about 90%. Shares have already given back some of this month’s gains.

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

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

Sheng said it was important to see if the apartments can be completed and handed over during the peak construction period in March and April.

This is really a temporary relief in terms of developers having to meet less debt repayment needs in the foreseeable future…

The new measures, widely reported in China but not officially released, include loan extensions, require equal treatment for developers 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 needing to meet fewer debt repayment needs in the foreseeable future – a temporary liquidity relief rather than a fundamental turnaround,” said Hong Kong 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 that homebuyer confidence hinges on developers being able to 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 before completion, generating an important source of cash flow for developers.

A long recovery

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

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

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

Residential home sales for the first 10 months of the year were down 28.2% from a year ago, the National Bureau of Statistics said last week. S&P Global Ratings said in July that it expects sales to decline by 30% for 2022, worse than in 2008, when sales fell about 20%.

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

Added to these concerns are the drop in prices.

Home prices in 70 cities fell 1.4% in October from a year ago, according to data analysis by Goldman Sachs released Wednesday.

“Despite local housing easing measures in recent months,” analysts said, “we believe housing markets in lower-tier cities still face strong headwinds due to weaker growth fundamentals relative to large cities, including net population outflows and potential oversupply issues”.

The report said house prices in the largest Tier 1 cities rose 3.1% in October compared to September, while Tier 3 cities saw a 3.9% decline during that period.

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

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

Trading of Evergrande, Kaisa and Shimao shares is still suspended.

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While Covid controls have held back China’s growth this year, woes in the housing market have also contributed significantly.

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

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

“It is too early to tell whether the measures introduced so far will be enough to save the real estate sector,” he said. “But it seems more reassuring now because it seems more likely that more forceful measures will be implemented if the housing recession still doesn’t turn significantly in the coming months.”

A longer-term transformation

Ultimately, China’s real estate sector is undergoing a state-directed transformation, towards a smaller part of the economy and a business model much less reliant on selling apartments before they are completed.

The housing market has shrunk by about a third from last year and will likely remain the same size next year, S&P’s Lu said.

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

In the first three quarters of the year, Lu said sales by state-owned developers fell 25%, compared to a 58% decline in sales for non-state-owned developers.

And despite recent policy moves, Beijing’s stance remains steadfast in deterring large-scale home buying.

Whether messages from the National Bureau of Statistics or the People’s Bank of China, this month’s official announcements reaffirmed that houses are for living in, not speculation—the mantra that heralded the early beginnings of the housing market crash.

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