MNI: China To Continue Housing Relaxation As Developers Suffer

China will continue to ease homebuying restrictions and increase financing support for developers, but authorities must accelerate and intensify policies and implement unconventional measures to help the market bottom as quickly as possible to hasten the recovery, advisors told MNI.

Beijing and Shanghai may lift home-purchase limits from suburbs this year, said Guo Xiangyu, director of research with the Research Center for Real Estate Finance at PBC School of Finance at Tsinghua University, a prominent think tank.

First-tier city Guangzhou lifted the limit on the number of suburban houses one can hold and eased limits on large home purchases citywide last year, while second-tier cities are expected to abolish purchase restrictions completely. (See MNI: China's Mega Cities To Ease Homebuying Limits Progressively)

Guo noted demand-side policies were headed in the right direction, but urged local authorities worried about over-heating the housing market to hasten relaxations to avoid cementing downturn expectations.

DEVELOPERS SUFFER

In the first two months of 2024, the 29.3% y/y sales decline outstripped the 20.5% fall in sales area, meaning developers were still slashing prices, said Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute.

Developer appetite for financing has also declined as profits slide. Funds received by property companies fell by 24.1% over the Jan-Feb period, greater than the 15.2% decline over the same period in 2023, Li said.

While local governments are matching housing projects with banks under the “whitelist” financing program to guarantee delivery, Li noted lenders increasingly fear risk contagion. Despite top policymakers’ repeated calls to meet reasonable financing demand equally, he noted private developers still found it hard to obtain funds for qualified projects with interest rates still above 6%.

UNCONVENTIONAL MEASURES

Guo emphasised the key to improving financial institutions at present lay in implementing specific and feasible due diligence exemptions and more "unconventional measures" should be considered amid the low appetite for bailouts.

Ni Hong, minister of housing and urban-rural development, said earlier this month struggling real-estate developers would not receive a major bailout and encouraged insolvent companies to declare bankruptcy.

The central government could establish a special working group to coordinate departments and designate, or even set up, a new market entity to take over projects of bankrupt developers, which would allow faster liquidation, and mergers and acquisitions to revitalise the market, he said.

Guo added local governments facing fiscal challenges are willing to take over unfinished projects only when receivable funds are sufficient to cover completion costs, arguing the central authorities could be more appropriate entities for such responsibilities.

“The possible funding sources could be policy banks, state-owned banks or their financial asset investment subsidiaries,” Guo said.

An exit mechanism can also ensure certain returns, he continued, suggesting the central government-backed entitycould provide liquidity support through secured credit facilities or loans while holding their preferred shares.

BUYER FORCE

Guo believes establishing a professional and influential buyer to acquire undervalued assets and speed up clearance will help the market bottom, which would require the relaxation of financial institutions and private funds investing in real estate.

He suggested authorities encourage insurance and other financial institutions to allocate funds towards existing commercial real estate to boost the equity capital of asset-management companies, which would increase their buying power.

Authorities could also allow Real Estate Investment Trusts to enter the commercial property market, including offices, hotels, and residential rentals, which will open more exit channels for asset-management companies and form a financial cycle, he added.

The changes will also avoid further accumulation of banks’ non-performing assets, he explained. To avoid further deterioration in expectations, Guo added local authorities should encourage price rebounds in certain areas by removing price caps and relaxing the lower limit for floor area ratio to allow high-quality houses in mega-city suburbs.

In February, the price index of new homes in 70 cities nationwide fell for nine consecutive months by 0.36% m/m, according to Li.