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Summary

  • Recent housing data show that housing prices and volume are both declining across major cities in China.
  • The financial well being of real estate developers continues to deteriorate.
  • Lending tightening has further stretched the already vulnerable funding chain.

Recent weakening of property activities in China was expected after the strong pick-up between mid-2012 and 2013. Both price and volume fell across the country, especially in 3rd and 4th tier cities.

Source:UBS

Amid such weakness, local governments in Tier 3 and 4 cities have already taken action to bolster the housing market by loosening previously imposed restrictions on additional property ownership.

No bolstering measures have been implemented in Tier 1 cities such as Beijing. As the most abundant regions in the nation, these cities have gotten used to buyers lining up outside sales centers. This time, however, transaction volume speaks for itself.

The Chinese Labor day holiday (5.1-5.3) has traditionally been a good time for the property market. Yet, during the 2014 labor day holiday, Beijing, China's capital and the most prosperous real estate market, saw only 200 suites (new and resale) transacted, a 82% decline from 975 for the same period last year.

(click to enlarge)

Source:www.guandian.cn

There may be many factors contributing to the recent property sector weakness and they together form a vicious circle:

  1. Construction outpaced sales and caused high inventories in tier 2 and tier 3 cities.
  2. Land prices skyrocketed and the de-stocking process causes earnings to shrink and cash flows to deteriorate.
  3. Credit conditions tightening both domestically and overseas.
  4. Shift in home buyers' psychology makes a buyer reluctant to enter the market and thus completes this vicious circle.

High inventory that would take years to digest

Source: UBS

Rental return continues to decline, and Tier 1 city residents choose renting over owning. Property investors are discouraged and shift to alternative investment opportunities and the demand side has been further suppressed.

(click to enlarge)

Source: Wind

Deteriorating of developer financial situation

As urban land supply becomes more scarce and local government's addiction on land sales proceeds, the pre-construction floor price has reached an unprecedented and unsustainable level. The spending spree in acquiring land at huge premiums in the past few years has subsequently caused huge cash flow problems.

(click to enlarge)

(click to enlarge)

Source:Wind

(click to enlarge)

Source:Wind

Source:Wind

Credit conditions tightening both domestically and overseas

Though there is no immediate threat of a tightening monetary environment, credit growth has to slow gradually in coming years following a massive increase in financial leverage in the past five years. Developers are now facing funding pressure from both domestic and overseas sources.

Source: UBS

Lenders are curbing lending to the real estate sector due to risk concerns, adding tension to the already vulnerable funding chain. The QE exit is shutting the door for offshore financing for onshore developers. April offshore financing amounted to $1.47 B, down 56% from March. Recent CNY depreciation also ballooned some developers' USD denominated liabilities.

Source: Wind

Source:Wind

Shift in homebuyer psychology

Mainstream media now are heavily covering the threat of a possible housing price collapse, which is really countering local government's bolstering efforts, as it encourages home buyers to delay entering into the market in anticipation of further price declines.

Source: China's Housing Sector: The Check Engine Light Is On