Experts: Troubled real estate has turned the corner, and things are looking up

After a period of adjustment, China's debt-ridden real estate sector, which is still considered a key pillar of the world's second-largest economy, is seeing signs of stabilization. Such signs are particularly visible in first- and second-tier cities. Industry experts suggested the residential market may recover in the second half of the year on the back of sustained growth.

Residential property transactions started to stabilize since May, and the trading volume of major Chinese cities' home markets surged about 50 percent month-on-month in June. The sector is on track to recover as the pandemic appears to be well under control by and large, and supportive measures to drive rational home demand are starting to take effect, said Xie Chen, head of research with CBRE China, a commercial real estate services and investment firm.

"We expect home sales in the second half will continue the recovery trend, and first- and second-tier cities with strong fundamentals would take the lead in the market rebound," said Xie.

"The industry has entered a new development phase, and we are waving adieu to the old days of pursuing scale expansion and growth speed," said Yu Liang, chairman of China Vanke, a prominent realty company, during a shareholder meeting in late June.

Although there have been recent instances of some homebuyers refusing to make mortgage payments due to delayed delivery or stalled construction of their presold homes, their impact on the realty and banking industries would be insignificant as associated financial risks are manageable and under control, experts said.

"Only a very low proportion of property projects in China are experiencing a delivery delay or construction standstill. Homebuyers' refusal to pay mortgage is more of a warning to push property developers to resume construction," said Hui Jianqiang, head of research at Beijing Zhongfang-Yanxie Technology Service Ltd.

"In fact, we shouldn't play up these refusals. And homebuyers wouldn't risk their personal credit as long as there's still a chance to settle the issue legally," Hui said.

Should there be any impact, the regulators concerned will deal with it, said Chen Sheng, president of the China Real Estate Data Academy.

An official from China's top banking and insurance regulator, who requested anonymity, said on July 14 the simple solution to the problem of delayed deliveries of some presold homes is to ensure timely deliveries.

From the regulator's perspective, that is paramount, the official said, adding the authorities concerned will implement the decisions and principles announced by the Communist Party of China Central Committee and the State Council, China's Cabinet. For instance, the regulator will continue to uphold the principle that "housing is for living in, not for speculation", and help stabilize land and housing prices as well as expectations.

Lian Ping, chief economist at Zhixin Investment and head of the Zhixin Investment Research Institute, said the conventional golden season of property transactions, which falls in the September-October period, is expected to be normal this year in key Chinese cities.

"Though the conventional golden September and silver October would not be as hot as they used to be due to macroeconomic pressures and some homebuyers' wait-and-see attitude, pent-up demand due to the COVID-19 impact may gradually come into the market from the third quarter," Lian said.

The latest data from the National Bureau of Statistics indicated home prices in China's 70 large and medium-sized cities remained largely stable month-on-month in June, with more cities reporting home price growth from a month ago.

"We are now at the end of the tunnel, and for the rest of the year, we can see the sector achieving stability," said Hui, citing the property development investment trend over the last six months.

China's investment in property development went down 5.4 percent year-on-year to 6.83 trillion yuan ($1.01 trillion) in the first half of this year, with 5.18 trillion yuan invested in residential buildings alone, down 4.5 percent year-on-year, NBS data showed.

Commercial housing sales in terms of floor area totaled 689.23 million square meters in the January-June period, down 22.2 percent year-on-year. In terms of value, sales dropped 28.9 percent to 6.61 trillion yuan.

The property development climate index compiled by the NBS stood at 95.4 points in June. According to the China Index Academy's calculation, in the new homes market, an average 30.99 million square meters per month were traded between January and June in the nation's 100 major cities, down 42 percent year-on-year, indicating a sluggish sentiment among homebuyers, a contrast to the scene in the same period of the past few years.

To brighten the market mood, the central government and related government departments have sent a series of positive signals so as to better meet the reasonable housing demand of homebuyers while sticking to the principle that "housing is for living in, not for speculation".

China's financial regulators said they will support the regular demand of homebuyers. The People's Bank of China, the central bank, and the China Banking and Insurance Regulatory Commission announced jointly in May that based on the corresponding tenor of benchmark loan prime rates, first-time homebuyers can receive interest rates 20 basis points below the lower limit of home loans from commercial banks, while that for second-home purchases will remain unchanged.

This not only cut the cost of home purchases but also helped boost rational demand and city-based home market policies, said industry analysts.

In the first half, local governments launched policies to suit conditions prevailing in local markets. Local-level measures were optimized about 500 times－a new record in terms of policy announcements made during the period, said Chen Wenjing, deputy director of research with the China Index Academy.

The measures to encourage rational demand coincided with mostly successful contagion containment steps, thus aiding realty recovery in key cities since May, she said.

June proved more encouraging as the recovery accelerated, which further shored up homebuying confidence and strengthened demand, said Wang Xiaoqiang, chief analyst with the Zhuge Real Estate Data Research Center, adding the recovery will further accelerate this month and in August.

Fang Ting, 26, a human resources executive at a private firm, and her boyfriend are among the beneficiaries of recent supportive policies. After sharing an apartment with others for three years, they finally moved into their own flat in Hangzhou, capital of Zhejiang province in eastern China.

Like most homebuyers in the 20-30 age group, Fang and her boyfriend did not have a big budget, so they settled for a pre-owned three-bedroom flat located close to a suburban metro station.

"The apartment meets all of our basic needs; in addition, the previous homeowner gives us 100,000 yuan price cut as he urgently needed the money to do his own business," Fang said.

With the economy widely tipped to recover in the second half, and property market expectations improving, demand will get released at an accelerated rate, especially in major Chinese cities with larger population inflows, more rapid income growth and stronger demand potential, said Lian of the Zhixin Investment Research Institute.

"A turning point is highly likely to arrive in the third quarter, which will make the whole-year property development investment positive with small single-digit growth."

Home transactions in big cities will lead the expected rebound, and further drive prices up. The fourth quarter is the most promising season for the real estate market, Lian said.

The policy environment is expected to continue the trend of the first half, and the sector will play a more important role in supporting the nation's economy, Xie of CBRE said.

Real estate contributed about 6.8 percent to China's GDP in 2021, according to a report in China Real Estate Business. Taken together, all the related sectors along the industrial chain are believed to have contributed 24.5 percent.

The property industrial chain is comparatively long, and it can actively drive related sectors of manufacturing and consumption along, Xie said.

"A realty rebound in the second half appears certain now. The only question is: How big will it be?" said Chen Sheng of the China Real Estate Data Academy.

Full-year transaction volume may recover in terms of home consumption and the land market, and stabilize around last year's peak level, he said.

Some 1.79 billion square meters of floor area of commercial housing was sold in 2021, up 1.9 percent year-on-year. In terms of value, commercial property sales rose 4.8 percent to 18.2 trillion yuan last year, according to the NBS.

Some 175 Chinese cities made over 600 adjustments to their property-related policies, which is unusual, said experts at E-House (China) Enterprise Holdings Ltd.

Lian of the Zhixin institute said additional measures may be in the pipeline to further boost the real estate market recovery. "The April 29 meeting of the Political Bureau of the Communist Party of China Central Committee showed the central government's resolve to ensure the property sector's stable and healthy development. That goal can be achieved only by ensuring rational homebuying demand and effective market supply."

Agreed Xie of CBRE. "A wide range of measures to match local conditions of different cities, and attaching equal importance to rental market, mean that we are in the midst of a medium- to long-term transition to high-quality development."

He further said that in the past few years, there have been a series of changes in the real estate sector, which showed the sector is placing increasing emphasis on high-quality development, stable growth, optimized structure of real estate businesses, improved operational efficiency, enhanced quality, and green and sustainable development.