Skip to content

Home Insights Insights library China’s property downturn may have found a floor
pageProperties.bannerAltText

China’s property downturn may have found a floor

The government’s will to reform a wayward real estate industry is balanced against the more urgent task of reviving a slowing economy, but Fidelity International thinks upstream ancillary sectors – and underlying demand fundamentals – could still offer growth opportunities for the near and long term.

 

Published 12 July 2022
Written by Tae Ho Ryu, Portfolio Manager, Fixed Income, Alex Dong, Research Associate, Ming Gong, and Terrence Pang

 

China’s love-hate relationship with property investment appears to have reached a new level. Hot on the heels of a nationwide clampdown on speculative housing purchases, a rash of stimulus measures for homebuyers is being rolled out.

Local governments have for weeks been vying to offer incentives, from lower transaction levies to smaller down payments, financial support for shantytown renewal and even cash rebates for home purchases. More and more cities are joining a chorus of mortgage rate cuts after the Chinese central bank made a large reduction in its five-year benchmark lending rate in May. These measures are telegraphing the shift to global markets: China’s leadership is getting serious about putting the real estate ship back on an even keel.
Given the policy softening and what Fidelity International views as the long-term resilience of some fundamental drivers, Fidelity International thinks the current slump in home sales could finally be finding its floor. While demand may not recover to the red-hot levels of prior years, a lot of existing homes in China were built decades ago and Fidelity International sees demand for upgrading these in the pipeline. The need to refurbish older buildings, including non-residential structures, should provide support over the next decade and beyond for upstream businesses that rely on the sector tangentially, such as manufacturers of paint, waterproofing and pipes.

Respite for the weary

For months, markets have absorbed the blows from China’s campaign to cull leverage-spurred excesses in the property sector, which included allowing some huge developers to default and buyers’ demand to shrivel. The fallout has slowed China’s economy and cast a shadow on global growth, as property and related sectors remain disproportionately large contributors to the nation’s GDP. The focus on curbing leverage isn’t going away, and nor are several limits on speculative activity, but the new signals of policy stimulus measures suggest the housing sector, with 18 trillion renminbi ($2.7 trillion) in 2021 sales according to the National Bureau of Statistics (NBS), appears to have been given a chance to catch its breath.
 

Chart 1: China home sales slump as policy turns supportive.
Line graph showing China home sales slump as policy turns supportive.  Vertical axis shows percentages and horizontal axis shows years from 2014 to 2023. The blue line shows new homes sold GFA growth year over year (RHS), which has fallen from 38.1% in March, 2021 to -32% in May 2022. The orange line shows average first-home mortgage rate (LHS) which has stayed between 7% and 4%. At the end of June 2022 it was 4.4%. The yellow line shows M2 growth year over year (LHS). From April 2021 when it was 8%, it has risen steadily to 11.1% at the end of May 2022.
Source: National Bureau of Statistics, Wind, GF Securities, Fidelity International, June 2022. Jan-Feb numbers are excluded to avoid Chinese New Year aberrations.

More resilience upstream

While residential developers are still struggling with headwinds, Fidelity International sees some resilience in related sectors that capture demand for building maintenance and upgrades. The total floor area of housing in China has grown to 60 billion square metres, according to Fidelity International’s estimate based on NBS data, even as new home sales decline year-on-year. A conservative projection of renovation frequency, once every 20 years, would mean there are 3 billion square metres of residential property undergoing upgrades or renovations every year. In addition, Chinese markets for architectural paint, waterproofing and pipes have been highly fragmented compared to those in developed countries, implying significant room for consolidation and market share growth for larger players. The latter in many of these sectors are relatively well-capitalized, which should enable them to weather downturns in the wider property market - like the current one.

Urbanization, meanwhile, remains a long-term demand catalyst. Low value-added housing blocks may be a thing of the past, but developments tailored for modern consumer demand, like housing designed for its ageing population or rentals for younger Chinese – think of it as Urbanization 2.0 – appear set to continue. Around two-thirds of China’s population live in urban areas, according to NBS data, far below the 83 percent in America, based on US Census Bureau estimates, but the Chinese ratio continues to rise steadily.

Selective, targeted relief

Recent city-level policies indicate how deep-seated demand for real estate in China is still trying to find its way to the market, despite the economic challenges. Multiple cities have issued measures allowing households with second or third children to buy additional properties. Changsha in Hunan province is allowing homeowners leeway to buy more homes, as long as they are rented out and don’t sit empty.

Macro policy too suggests the government’s views on the compounding issues in the sector are evolving. In addition to the latest rate cuts, policy makers have been asking banks to lend more to developers. The government has also issued policy measures supporting onshore bond issuance for selected developers, a move aimed at providing credit risk mitigation and protections to investors. None of this amounts to a bailout, rescue package or other dramatic intervention. But directionally it marks a clear shift, and one that’s likely to help the consolidation of quality in the industry.

We are not out of the woods yet. Delivering some clear successes on the restructuring of developers would do much to promote investor confidence. China’s zero-COVID policies have been adding another layer of uncertainty. And without further cuts in long-term lending rates, many of the efforts at keeping the sector afloat so far appear to have had limited impact.

Lastly, to the extent that the ongoing restructuring forces greater financial discipline and consolidation, leading developers could emerge with stronger balance sheets. Far from losing relevance, Fidelity International thinks China’s property sector may remain a significant cornerstone for the economy for years to come, albeit with up and downs.

 

 

 

Issued by Fidelity Investments Canada ULC (“FIC”). Unless otherwise stated, all views expressed are those of Fidelity International, which acts as a subadvisor in respect of certain FIC institutional investment products or mandates.

This document is for investment professionals only and should not be relied on by private investors.

This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without the prior permission of Fidelity.

This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorized or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.

This communication is not directed at and must not be acted on by persons inside the U.S. and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorized for distribution or where no such authorization is required. Fidelity is not authorized to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisors.

Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.

This document may contain materials from third parties which are supplied by companies that are not affiliated with any Fidelity entity (third-party content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.

Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.

©2022 Fidelity Investments Canada ULC. All rights reserved.
 

Contact the team

Content is loading, please wait