12 Sep 2023
China's property industry has been an important engine of economic growth over the years and accounts for as much as 30% of the country's GDP. The sector represents more than half of global new home sales and home building, and is the largest asset class in the world, with an estimated market value of around $62 trillion. Investors see the revival of the property sector as crucial to the recovery of the world's second largest economy following three years of self-imposed pandemic isolation.
Why is property ownership such a big thing in China? In the mid-90s, a series of reforms allowed urban residents to own and sell real estate. People could buy their previously government-owned homes at extremely reasonable prices, and most of them jumped at the chance. And once you’re a homeowner in China, there are no ongoing property taxes to pay, so it’s no surprise that property now accounts for around 60% of Chinese household assets and there’s still a strong desire to invest in real estate with a relatively high rate of multiple home ownership.
Why is China having a property crisis? For decades, regulators allowed developers to gorge themselves on debt to finance a growth-at-all-costs strategy. In 2020, the Chinese government wanted to slow speculative property construction and the flow of cheap money to China’s biggest real estate companies and intervened by placing limits on the amount of borrowing large construction firms could take on, restricting their access to capital.
What’s the result of this drastic shift in regulation? Chinese real estate developers are on the verge of collapse! Country Garden, the nation's largest property developer with nearly $200 billion in total liabilities, announced it lost $6.7 billion in the first six months of this year. The company, renowned for taking on large-scale projects in China’s 2nd and 3rd tier cities, missed $22.5 million in coupon payments in August and is currently facing mounting pressure to pay off its debts. The alternative - following hundreds of other developers into default and restructuring.
This current tumultuous story of the Chinese property market is nothing new. One of the largest developers, Evergrande, collapsed in December 2021. With $300 billion in liabilities, they couldn't shore up cash fast enough to make their debt payments, triggering a market panic. A wave of defaults followed, and China's vast real estate market took a nosedive.
So, the question on everyone’s lips - will the issues in the Chinese property market bring down the global economy? We’ve had our fair share of black swan events over the last few years and as investors, we’re probably more tuned into the next potential catalyst for a market crash than ever before. Since reopening after the pandemic, the Chinese economy hasn’t fully got back into gear. China is clearly influential in the world economy and represents a large piece of the emerging markets pie, so it’s not inconceivable to think that strain on the Chinese property market might cause a ripple effect when it comes to the global economy. Bad news stories can grow legs and spread and negative sentiment can travel fast across a sector. How should the balanced investor react?
Let’s look at the facts. Property in China accounts for more than a quarter of the economic activity in the country and this hasn’t passed the policy makers by. The Chinese central government has picked up the pace when it comes to boosting the country’s housing market by supporting their currency and stimulating the consumer. More specifically, the People’s Bank of China has lowered their minimum mortgage interest rates for first time buyers, reduced interest rates on outstanding mortgages and standardised down-payment ratios. The bank will also cut the amount of foreign currency that financial institutions are required to hold. It might be a while before this combined strategy fully bears fruit, but Chinese leadership is pragmatic, and confidence in the ruling party is high as they have a history of adopting policies that generate the desired effect.
Does this property sector blip have a chance of working out? The share price of the ailing developer Country Garden has already shown signs of moving in the right direction after its creditors agreed a delay on debt repayments, offering some respite from the crisis-hit property market. The tables won’t turn immediately but a truly diversified portfolio can offer protection against a relatively temporary setback and in the longer and broader term, it’s a question of making an informed call on exactly how the Chinese property scenario will pan out.
Jon Lycett, Key Accounts Manger
Katie Poulson, Client Engagement & Marketing Manager
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