Chinese property developers set to benefit from government policies, but relief could be brief
Originally published at the South China Morning Post on January 18, 2016.
Mainland property developers’ stocks are set to benefit from government policies that will stabilise the housing market momentarily, but analysts expect housing to flatline in two years before turning negative as China’s aged population continues to grow.
Property sales are expected to maintain a high level of about 9 trillion to 10 trillion yuan, after the 8.8 trillion yuan recorded last year, but the housing market is predicted to see no growth in 2018 before falling significantly starting from 2020, according to a report citing Ding Zuyu, the co-president of consultancy E-house, that was released by Jefferies on Wednesday.
Residential property would be the most stable sector, while retail would be oversupplied, the report said. Tourism and office property would face “great pressure”, and housing for the elderly would require more time to pick up.
“Operationally, leading developers will benefit from larger market share and room for cost reduction on labour,” Jefferies analysts said. “We maintain our cautious view on stocks due to capital structure concerns on the volatile RMB.”
Before the introduction of the two-child policy last month – an attempt to address the mainland’s ageing society and slowing economic growth – more than 38 per cent of the population was expected to be older than 60 by 2050.
The report said new policy stimulus would enable the housing market to remain stable, although property investment would continue to fall before seeing growth again in the last quarter of this year. Down payment requirements for home sales, currently at 20 per cent to 30 per cent, might be lowered to 10 per cent to combat weak sales, analysts said.
“If that happens, it will drive market demand significantly, especially for mid- to high-end projects,” they said. “In a worst case, home purchase restriction removal in tier-one cities may imply substantial economic turmoil.”
Other policies could include allowing mortgage loan interest to be deducted from personal tax liabilities in the second half of this year. Analysts said that large developers like China Overseas Land and Investment and China Resources Land “should stand well on excellent risk management”, while SZI, Jinmao and Greentown also had potential to generate high returns.
In the second week of January, property sales fell by 12 per cent compared with the first week of the year, which saw sales fall 8 per cent month on month, China International Capital Corporation said in a report. Nine of the 16 Chinese cities in the report saw a weekly drop in sales volume, with sales in Shanghai down 15 per cent, Beijing off 21 per cent and Tianjin down 14 per cent.
CICC analysts said A-share valuations were rich but had declined significantly this year as the market entered a subdued period ahead of the Lunar New Year. Their recommendations included Beijing Capital Development, Jinqiao, Lujiazui and China Enterprise.
Property sales in the last quarter of 2015 were better than expected, following the implementation of policy easing for first-time mortgage borrowers in September and mild price growth. Destocking could be most effectively achieved through price cuts, as well as government measures to offer tax rebates to mortgagees and to lower buyers’ down payments, China Reality Research said in a report this month.
Tier-two cities drove sales growth during the last quarter of 2015, and might continue to do so during the first half of this year, the report added.
“Sales managers remain cautiously optimistic on their local markets in 2016, but sentiment among tier-three-city sales managers has weakened versus two months ago partly due to rising inventory,” CRR analysts said, adding that they saw “limited room for price growth”.
China may also slow construction of social housing by 16.6 per cent this year and by 6 per cent next year, the report said. The government achieved its target of supplying 36 million units from 2011 to 2015. “This is positive for private market destocking but negative for materials demand,” the report said.
Despite the anticipated downturn, Jefferies analysts said the market would also become less competitive, giving developers more opportunities. About 80 per cent of developers are expected to leave the industry, with the top 10 developers accounting for just 17 per cent of market share and the top 50 having only 32 per cent.