Moneycontrol Pro Panorama | No end to China's real estate problem

The real estate sector's problems are unsold inventory, unfinished homes, struggling developers, and a severe lack of buyer confidence.

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After a robust surge on Tuesday driven by developments in China, metal stocks cooled down by Wednesday. China's recent announcement of measures to stabilise its crisis-hit property sector initially spurred hopes of increased demand from the Chinese real estate market. However, a closer examination reveals that the market's optimism may have been premature.

Let's delve into the issue at hand.

China's real estate sector, which constitutes 30 percent of the nation's GDP, has been in decline since peaking in 2018, with the downturn accelerating from 2021 onwards. Following a spate of defaults, most of the leading Chinese real estate developers are now either bankrupt or entangled in lawsuits.

As of April, new home prices had been falling for 10 consecutive months, marking the steepest decline since November 2014. Property sales by floor area plummeted 20.2 percent year-on-year from January to April, while new construction dropped 24.6 percent. Furthermore, developers have seen their fundraising efforts shrink by 24.9 percent compared to the previous year.

The industry is burdened with record levels of both finished and unfinished homes. According to Goldman Sachs, the saleable housing inventory in China's real estate sector stood at 13.5 trillion yuan by the end of 2023. Additionally, 391 million square metres (4.2 billion square feet) of new housing were put up for sale from January to April, a 24 percent increase year-on-year. The cost of unsold inventory is estimated to be around $1 trillion.

In summary, the real estate sector's problems are unsold inventory, unfinished homes, struggling developers, and a severe lack of buyer confidence. The proposed measures to stabilise the market might not be enough to reverse these entrenched issues, casting doubt on the initial market exuberance for metal stocks.

Since 2021, the Chinese government has introduced a series of measures to address the ongoing issues in its real estate sector. These include lowering interest rates, reducing down payments, encouraging the replacement of old apartments with new ones, incentivising state governments to support the sector, and providing easy finance to developers. Despite these efforts, the sector remains in a downward spiral.

Analysts are sceptical about the latest round of announcements as well. Deputy Governor Tao Ling of the People's Bank of China recently informed reporters that the central bank would allocate 300 billion yuan ($42.25 billion) to financial institutions for lending to local state-owned enterprises (SOEs) to purchase unsold, already-built apartments. This initiative is expected to release 500 billion yuan in financing, potentially turning these purchases into affordable housing. Additionally, it aims to free up funds for real estate companies, allowing them to complete the construction of other apartments.

To address the problem of unfinished, pre-sold properties, commercial banks have been provided with 935 billion yuan in loans to complete construction on whitelisted projects.

However, analysts believe that these measures will serve as mere temporary fixes to a deep rooted problem. Larry Hu, chief China economist at Macquarie, expressed his concerns in an interview with CNBC, stating, "At this stage, it's mainly SOEs and local governments implementing the policies, but their resources may be too limited to move the needle at the macro level."

Goldman Sachs has cast doubt on the efficacy of the Chinese government's latest funding measures to address the real estate sector's woes. In a recent note, the investment bank highlighted that the proposed funding corpus is insufficient. Their property team estimates that at least 1 trillion yuan is necessary to absorb excess inventory and stabilise new home prices within a year.

Around 20 million pre-sold apartments remain incomplete, resulting in a funding gap of approximately 3 trillion yuan ($414.58 billion). Goldman Sachs further notes that the total value of unsold homes, unfinished projects, and unused land in China is about 30 trillion yuan ($4.1 trillion). To reduce the housing supply to 2018 levels—the peak of the real estate boom—an estimated 7 trillion yuan ($967 billion) would be needed across all cities. This figure dwarfs the funding announced by the People's Bank of China (PBOC), which is more than 20 times smaller.

Ting Lu, chief China economist at Nomura, labelled the housing issue "epic". He asserts that merely completing the construction of pre-sold homes would require at least 3.2 trillion yuan ($442 billion). Currently, there are 20 million such unbuilt pre-sold homes.

The Chinese government aims to kickstart the market by bailing out developers, enabling them to finish old projects and deliver them to buyers. However, this strategy does not address the need for incremental demand and new development, which are essential for growth. Government data indicate that 96 percent of households own at least one home. With housing prices continuing to fall, real estate has lost its appeal as an investment.

Given these circumstances, the Chinese government's current efforts are unlikely to succeed, much like previous initiatives. For Indian metal stocks, which have surged on the back of anticipated demand from China's housing sector, the wait for a market recovery may be longer than expected.

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