China’s Real Estate Market Faces Declining Sales as Developers Struggle
New home sales for the top 100 developers in China have fallen by about a third in June and July compared to the previous year, marking a significant drop after double-digit growth earlier in 2023. This information comes from a report by S&P Global Ratings, which highlights the challenges faced by the Chinese property sector.
The situation has been further aggravated by the recent bankruptcy filing of Evergrande, the world’s most indebted property developer. This move has shaken investor confidence and raised concerns about contagion in the Chinese property market. Additionally, Country Garden, another major developer, is facing a looming default, making it even more difficult for developers to raise funds.
The declining sales and uncertainties in the property sector have prompted calls for policymakers to step up support for the industry. Prospective home buyers are holding back on making purchases, exacerbating the weak sales and leading to significant cash flow issues for developers. Sales have not shown any signs of improvement yet, according to Edward Chan, a director at S&P Global Ratings.
These challenges are occurring against the backdrop of a slowing economy in China. The debt troubles at Country Garden and the uncertainty surrounding government support are further contributing to unease in the housing market. The Chinese property sector has been struggling since 2020, when Beijing introduced measures to curb the debt levels of mainland property developers.
The Chinese government implemented the “three red lines” policy, which established specific balance sheet conditions for developers to meet if they wanted to take on more debt. These conditions included limiting debt in relation to cash flow, assets, and capital levels. Evergrande’s default in late 2022 was the first high-profile case resulting from these measures.
The potential default by Country Garden could add $9.9 billion to the global emerging markets high-yield corporate default tally. In 2023 alone, the total default volume for the Chinese property sector could reach $17 billion, according to JPMorgan. The U.S. investment bank expects China property to account for almost 40% of all emerging market default volumes this year.
Country Garden’s sales performance has been disastrous, with sales dropping by about 50% year-on-year in June and July. Lower-tier cities started experiencing sales weakness in May, while higher-tier cities saw sales worsen in subsequent months. As a result, it is becoming increasingly challenging for China’s overall real estate sales to meet expectations.
Despite the challenges in the property sector, state-owned developers are in a better position to weather the storm than non-state ones. Contracted sales for state-owned developers grew by 48% in the first seven months of 2023, while non-state developers saw sales fall by 19%. State-owned developers are benefiting from robust home sales, enabling them to buy land from local governments and boosting their cash flow.
However, the prevalence of state-owned developers in the industry may complicate forecasting actual demand. The industry is becoming increasingly reliant on state-owned developers, with 87% of land purchases by value being made by them this year. This figure has significantly increased from 59% in 2021, according to data from Natixis Corporate and Investment Banking.
Nonetheless, there is still underlying housing demand in first-tier cities that remains somewhat resilient and untapped. This demand may be unleashed once there is greater policy clarity. Timely policy measures to stabilize demand and sales in higher-tier cities are crucial, which may then spill over to lower-tier cities over time.
The Chinese government has yet to demonstrate a clear plan to address the challenges faced by the property sector. The uncertainty surrounding government support and the debt troubles at Country Garden are creating broader concerns in the housing market. As the situation continues to unfold, it is essential for policymakers to take decisive action to stabilize the real estate industry and protect the overall economy.