China’s real estate market is facing an acceleration of its troubles as home buyers hesitate to make purchases, resulting in weak sales and cash flow issues for developers. The top 100 developers have seen a drop in new home sales by about a third in June and July compared to the previous year. Edward Chan, a director at S&P Global Ratings, believes the situation may deteriorate further. The recent default by Country Garden, the world’s most indebted property developer, has also added to the challenges faced by China’s real estate industry. This crisis of confidence is putting pressure on the second-largest economy in the world.
The Chinese property sector has been suffering since 2020 when Beijing implemented stricter regulations on the debt levels of developers. These measures, known as the “three red lines” policy, require developers to limit their debt in relation to their cash flow, assets, and capital levels. The aim is to address the oversupply issue caused by years of excessive growth in the industry, which led to ghost towns and unsold properties. Country Garden’s default and the uncertainty surrounding government support have further contributed to the unease in the Chinese housing market.
Country Garden’s problems are largely attributed to its focus on lower-tier cities, where there is an imbalance between housing supply and demand. About 61% of the company’s developments are located in these cities. S&P Global’s Chan noted that Country Garden’s sales performance has been disastrous, with a significant drop in sales in June and July compared to the previous year. This downward trend has affected both lower-tier and higher-tier cities. As a result, it is becoming increasingly difficult for China’s real estate market to reach sales targets. S&P Global’s base case for this year is 12 trillion to 13 trillion yuan, but it may fall to 11 trillion yuan in the bear case scenario.
While state-owned developers are seeing growth in contracted sales, non-state developers are experiencing a decline. This divergence is due to the ability of state-owned developers to buy land from local governments, thanks to their robust cash flow from home sales. State-owned developers accounted for 87% of land purchases by value in the first seven months of this year. This trend suggests that state-owned developers will have a greater presence in the real estate market going forward. However, the high number of state-owned developers may make it challenging to forecast actual demand. It is essential for the government to stabilize demand and sales in higher-tier cities to eventually extend the stabilization to lower-tier cities.
In conclusion, China’s real estate market is facing significant challenges due to weak sales, cash flow issues, and the uncertainty surrounding government support. The focus on lower-tier cities has exacerbated the imbalance between housing supply and demand. State-owned developers have an advantage over non-state developers in terms of sales and land purchases. However, policy clarity and stability are crucial for the market’s long-term growth and unlocking the untapped housing demand in higher-tier cities.
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