This article is an on-site version of The Lex Newsletter. Sign up here to get the complete newsletter sent straight to your inbox every Wednesday and Friday
Has China’s property sector finally reached a bottom? New home prices stabilised in January. That was significant. Prices fell in the previous 16 months.
Beijing wants to underpin that stabilisation. Officials generally keep a tight rein on private equity groups, particularly foreign ones. But they are now keen for the alternative asset managers to buy into local real estate. That abrupt change of tone highlights the severity of the challenges still facing property businesses and their lenders.
New home prices in 70 mainland cities fell just 0.004 per cent in January compared with the previous month. Shares of local property developers are up about two-thirds from October lows.
But it is too early to call a bottom. Compared with the same period last year, prices are still down 2.26 per cent. Developers, after defaulting on $50bn worth of bonds last year, are struggling to secure funds. House price declines last year were small compared with the more than tenfold increase over the past two decades.
That means the sustainability of recovery will depend not only on support from local governments and lenders, but also foreign investors.
It explains why China approved the establishment this week of real estate-focused private equity investment funds. The move allows funds to focus on residential property, including unfinished projects, and infrastructure.
Notably, regulators are explicitly encouraging foreign investors to invest in these funds.
Local lenders have been increasingly reluctant to lend to developers after last year’s defaults. Their investments in property development fell a tenth last year, the first drop in more than two decades.
Asia-focused lenders reported losses in the sector with results this week. HSBC increased credit losses and other impairment charges to $3.6bn for last year, compared with $1.1bn for the first half of the year. The struggling mainland Chinese commercial real estate market was the main culprit.
Expected credit losses and other impairment charges for Hang Seng Bank, an HSBC subsidiary in Hong Kong, last year roughly doubled. Its credit impairment ratio related to China commercial property investment was about 72 per cent. For Standard Chartered, 70 per cent of last year’s overall credit impairment charge was because of exposure to Chinese property.
For local lenders, the impact is much more pronounced. Officials have been pressuring them to prop up developers so they can complete unfinished housing projects or, worse, bail out the weakest ones. The non-performing loan ratio on local property rose sharply last year.
Beijing has mistimed its plea for foreign investors to pitch in too. Trends in the Chinese bond market have underscored a new urgency among overseas investors to leave the country, not the other way around. The balance of yuan-denominated bonds held by foreigners fell every quarter last year. The decline was the first annual drop on record. Reversing course will not be easy.
But while investing in real estate may still look unappealing, the sector’s stocks are a better proposition.
Not all local developers are alike. Even amid last year’s chaos, three of the largest builders — Country Garden, Poly Real Estate and Vanke — recorded brisk sales growth. But because of the headwinds facing the sector, shares of the trio remain sharply down for the past year.
The stock of Country Garden, the best positioned to withstand the storm, has fallen the most, down more than 60 per cent in the past year. Shares now trade at just 4 times forward earnings. Investors that fled the sector last year have not returned. They look a safer bet for foreign investors than unfinished projects accessed via a private equity fund.
Enjoy the rest of your week,
Lex Asia editor
If you would like to receive regular Lex updates, do add us to your FT Digest, and you will get an instant email alert every time we publish. You can also see every Lex column via the webpage