China Property Sales: Housing market recovery is lucky for distressed developers

Beijing has been strong-arming builders to restart stalled developments, so they can deliver pre-sold flats to disgruntled consumers. Revenue as contractors is smaller but the work flow is steady. (Source: Bloomberg)

Timing is everything. Just when China’s distressed developers are delivering their worst annual earnings on record, the country’s housing market is turning the corner.

Beijing’s abrupt exit from COVID Zero in late 2022 is reviving the real estate industry, which accounted for as much as one-quarter of gross domestic product. Despite last year’s regulatory crackdown, homeowner protests against stalled construction projects, and threats of mortgage boycotts, buyers are coming back to the housing market. In March, property sales volume in 30 major cities rose 44 percent from a year earlier, after averaging a 13 percent decline in January and February. This pace is mirroring that of 2019, according to Gavekal Dragonomics, a research outlet.

Sentiment is improving. Of the 70 major cities tracked by the government, 55 had price increases in February, versus only 15 in December. The share of households saying they plan to buy a home in the next quarter rose to 17.5 percent, the first meaningful uptick in three years, according to the central bank’s latest survey. Chinese families have not given up on the idea of building their wealth through property yet.

Some of this is due to policy. Beijing has been strong-arming builders to restart stalled developments, so they can deliver pre-sold flats to disgruntled consumers. Zhengzhou, a city in east-central China and the epicenter of those homebuyer protests, rolled out a 10 billion yuan ($1.5 billion) fund to help developers resume projects. Some builders, including blue-chip Country Garden Holdings Co, are now in the business of construction services. Revenue as contractors is smaller but the work flow is steady.

This physical market revival is a much-needed and welcoming narrative for developers struggling to hand out their 2022 report cards this earnings season. Among 65 builders listed in Hong Kong, 21 have issued negative profit warnings, and 13 are in trading halts and have missed their results deadlines, according to data compiled by S&P Global Ratings. Shanghai-based Sinic Holdings Group got delisted recently, less than four years after it went public. It had not disclosed 2021 financials, and trading in its shares had been suspended since September 2021.

With things looking like they are picking up, developers can now ask investors to look past 2022. Some may be able to make progress on debt repayments. Sunac China Holdings Ltd, a distressed builder that recently announced a restructuring plan, finally saw an uptick in contracted sales after one year of decline. Even China Evergrande Group, the world’s most indebted builder, recorded 13 billion yuan of sales in March, suggesting some resumption of its business operations. As for the more prudent ones, such as China Vanke Co, they can raise fresh equity again.

Investors are clearly still nervous, however. State-backed Sino-Ocean Group Holding Ltd’s surprise decision last month to defer a coupon payment to “preserve cash,” which it reversed days later, was a wake-up call that developers’ liquidity crunch is not over. Nonetheless, hope that apartment sales are recovering is keeping bond traders from panic selling, thereby giving builders some breathing room.

After two years of harsh regulatory crackdown, China’s real estate market has flushed out the worst operators, the optimistic thinking goes. I disagree. Some of those that survived are not the fittest. They are just lucky.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. Views are personal, and do not represent the stand of this publication.

Credit: Bloomberg