President Xi Jinping has long kept an eye on the country’s residential sector. When China held its 19th Party Congress in 2017, Xi warned that houses are for living in, not speculation. Soaring prices have imposed a heavy debt burden on most people, even as the wealthy strata snap up choice assets. In 2020, the Chinese government imposed what has been dubbed the “three red lines” framework meant to regulate leverage taken on by developers based on the metrics of debt-to-cash, debt-to-equity and debt-to-assets only. For the authorities, implementing stricter rules would deter speculative buyers and work towards building China’s property space into a controlled one that is growing steadily.
The three red lines triggered plenty of figurative red ink for the developers. Developers in China pre-sell to buyers, and they take the money collected, plus borrowed money, to buy more land — a practice that some have called a Ponzi scheme. When the funding was tightened, many projects could not be completed. As more such incidents happened, mortgage holders banded up to protest and stopped paying their loans for the homes they were promised.
Property giant China Evergrande Group is the second-largest real estate developer in China by sales. But it soon found itself in financial trouble due to its debt load of US$300 billion, which it struggled to service. Smaller developers, with less financial muscle, similarly suffered.
The onset of the pandemic, coupled with the government’s strict zero-Covid policy, undoubtedly exacerbated the situation, with the severe lockdowns deterring many potential buyers from offering properties.
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“We always thought that the approach [by the Chinese government] was “scare, but do not destroy”, given how much people have invested in the sector,” says Allianz Global Investors’ global chief investment officer for equities Virginie Maisonneuve. “But at the same time, some unhealthy behaviour must be corrected.”
With China’s top real estate developers under severe pressure and waning trust from the Chinese public, can a post-Covid-19 China restore faith in time with an effective industry-wide facelift?
Iris Pang, chief economist of Greater China at ING Group, says there is hope on the horizon for China’s real estate sector, particularly with the easing of Covid-19 measures. The market, she adds, is seeing “genuine demand”, which the government is trying to unleash by introducing tax cuts and lower mortgage rates for first-time buyers.
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Local governments have also been reported to help developers finish uncompleted projects. “But an improvement in market sentiment will only happen if some of the larger projects are finished to a high standard,” says Pang.
Demand previously stymied should be reactivated. “[While] this does not help housing starts, at least some buyers are back in the market,” adds Pang. Similarly, Maisonneuve says that confidence, strained too by the weaker overall economy, must be restored among home buyers for the market to pick up. “[At this juncture,] people mustn’t lose confidence in their investments in the property market without fuelling speculation,” she says.
If the authorities can relax the strict Covid-19 measures, it will be a significant confidence boost for the market. For now, there are already newly-introduced measures to help lift sentiment, but not to the extent of bailing out excessively leveraged developers. “It’s going to take time, but we believe the market will stabilise and slowly restore the confidence [in the sector] and the wider macroeconomy.”
