26 minute read
OFFICE CULTURE RETURNS
BACK TO WORK
Following its nadir in 2020, the future for Asia’s commercial real estate sector looks more secure as hybrid and more traditional office models regain the momentum from WFH
BY GEORGE STYLLIS
A GALLERY OF COLLEAGUES’ FACES ON A TABLET OR A SCREEN HAS BECOME ONE OF THE MOST RECOGNISABLE ASPECTS OF THE WFH ERA
It’s easy to characterise the pandemic era as being shapeless. It’s a fact that the period has taken on the time-looped persona of the classic movie Groundhog Day.
With offices, restaurants, parks, schools, shops, and a host of other services in countries around the region slipping in and out of operation to varying degrees, the past couple of years have certainly often felt like an endless series of days blurring into one.
Yet there have been some radical shifts throughout the pandemic so far as the sweeping predictions of early 2020 have been chewed over, considered and — often — dismissed. We now know for certain that virtual cocktail parties are no substitute for real ones. The mass exodus from the globe’s big cities, as predicted by analysts, has yet to occur and is unlikely to do so. Likewise, the irreversible decline of the commercial real estate sector is another prediction that looks increasingly misguided.
“According to JLL’s recent survey of 1,500 employees across Asia Pacific, respondents have indicated that their ideal number of remote workdays is slipping,” says Roddy Allan, chief research officer, Asia Pacific for JLL. “People are increasingly missing the office, as home working fatigue rises, and productivity levels decline.”
Rewind to the dog days of 2020 and the picture looked very different. Indeed, many believed that the pandemic spelt game over for traditional office culture.
Lockdowns were enforced around Asia and much of the rest of the planet. While the situation wasn’t welcomed by everyone, many workers embraced the “new normal” of home officing. And for a while WFH did look like the future. Many enjoyed the shorter commute to their kitchen table, sofa or home office, being able to avoid traffic and spend more time with their family. And it was easy to see the clear damage the pandemic was inflicting on the commercial office sector. According to CBRE, office net absorption fell 34% year-onyear to 16.3 million sq ft net floor area (NFA) in H1 2020, the lowest first-half total in a decade. While leasing activity in mainland China tier 1 cities began to recover in March as lockdowns were eased, all other major THE REIT STUFF
All around Asia central banks have been printing cash to boost moribund economies slammed by the pandemic.
And with fears of inflation rising, investors are doubling down on property to hedge against rising prices.
Benefitting from this frenzy are real estate investment trusts (REITs), whose valuation are at their highest since before the 2008 financial crisis. “I have been saying for the last two years that REITs are a good inflation hedge,” Charlie Chan, one the region’s best known hedge fund managers told Reuters. “They are easier to value, you get what you see, and you own the building. If there is inflation, the building price will just go up.”
Since REITs hold various kinds of properties, from factories to shopping malls and hotels, they benefit from higher rents when economies boom and prices rise. Unlike gold, which doesn’t pay any dividend, REITs also provide a steady flow of income. Yields for REITs in Asia stand at 4.4 percent on average, according to data from StarMine. Spot gold fell 13% this year to May 7. By comparison, the MSCI Asia Pacific REITs index rose 14% according to data from Thomson Reuters Datastream.
“Yield-hungry investors are increasingly being squeezed out of the sovereign bond markets by central bankers everywhere,” David Baran, co-founder of hedge fund Symphony Financial Partners in Tokyo told Reuters. “REITs are an increasingly compelling asset class.”
Preference for flexibility has grown, highlighting that hybrid work arrangements may be the way to go. The model remains top of mind for employees and should be considered by employers if they want to attract and retain talent
markets, especially Tokyo and major cities in India, saw a significant slowdown in demand in Q2 2020 as restrictions on mobility and business activity came into force.
Other notably weak markets included Hong Kong, which witnessed two consecutive quarters of negative net absorption and its lowest half-yearly figures on record. The total value of transactions plummeted by nearly 40% in the year to September, as the number of deals fell by almost a third, according to Real Capital Analytics.
Indeed, the grim prognosis for commercial real estate was being borne out around the region: with key commercial real estate markets including Bangkok, Metro Manila and Singapore slammed by travel restrictions and investor hesitation. The existential question over whether office culture was really on its way out seemed like a pertinent one to pose.
Late in 2021, the picture has brightened considerably even as the pandemic has rumbled on. In stark contrast to its tidings from the same juncture last year, CBRE announced in August that the volume of investments in commercial real estate in APAC leapt 99% to USD41 billion in the second quarter from a year ago, returning to pre-pandemic levels. Increased investment in the logistics and industrial, office and retail sectors indicate an ongoing recovery of the region’s capital markets. Despite the appearance of these robust green shoots, the devastation wreaked by the pandemic continues to have ructions. One of these is the presence of office space oversupply in major cities around the region.
“Office space vacancy is at an all-time high,” says Raymond Rufino, CEO of Neo Office PH, a sustainable developer in the Philippines who specialises in commercial real estate. “I think we’re reaching 15% vacancy (in Metro Manila). Vacancies were historically in the low single digits for certain sectors, so this figure is painful. If you’re a landlord and you want your tenant to renew, you must give concessions. It’s a tenant market.”
But at least it’s a viable market, indicating that rumours of the imminent death of the commercial real estate sector were — as the saying goes — greatly exaggerated. Indeed, reports like a recent study conducted by CBRE that found that almost half of 109 companies across Asia prefer dedicated seats for their staff suggest that a return to the pre-pandemic model has not been roundly rejected.
“Although a hybrid model has been adopted in more recent times, eventually it will be back to the environment before the pandemic,” says Prem Kumar, deputy managing director of Jones Lang Wootton in Malaysia.
“However, the platform of a WFH environment is very much more transparent now and as such the capability of adopting a
AS TIME APPEARED TO STAND STILL AND PROJECTS WERE PUT ON HOLD DURING THE PANDEMIC, CONTRACTORS FACED A RANGE OF CHALLENGES INCLUDING CASH FLOW ISSUES AND EXPOSURE TO LIQUIDATION DAMAGES AND TERMINATION
SOLID FOUNDATIONS
Asia’s dynamic cities are famous for their constant thrum of building work. Therefore, it was inevitable that the construction sector would be badly hit by factors such as stringent lockdowns and social distancing norms.
As time appeared to stand still and projects were put on hold, contractors faced a range of challenges including cash flow issues and exposure to liquidation damages and termination.
Even after building work was greenlighted again, contractors were forced to comply with a new normal of health and safety SOPs, shortage of workers, restricted working hours, supply chain delay, rework after the suspension of construction and reduced workforce due to social distancing protocols. It’s no surprise then that projects around the region are running well behind schedule.
It has not been all doom and gloom for the construction sector, however. Indeed, the industry has benefited as governments around the region have pushed forward with ambitious infrastructure plans.
“Professionals expect governments to boost infrastructure spending on the road to economic recovery. This will provide a ray of light amid the gloomier outlook for the sector, perhaps pointing to a way out of the current downturn,” commented Sean Ellison, a senior economist at the Royal Institute of Chartered Surveyors (RICS) in a report released last year.
Indeed, the long-term outlook for the industry is rosy. According to Future of Construction, a forecast produced by Oxford Economics and Marsh McLennan companies Marsh and Guy Carpenter, the global construction industry is expected to grow by USD4.5 trillion over the next 10 years to reach USD15.2 trillion by 2030. This is up 42% from USD10.7 trillion in 2020, and 35% higher than the previous decade to 2020.
AS THE PANDEMIC DRAGS ON, EMPLOYEES AROUND SOUTHEAST ASIA ARE CRAVING THE SOCIABLE, COLLABORATIVE ASPECTS THAT TRADITIONAL WORKPLACE CULTURE CAN PROVIDE
similar arrangement in certain specific scenarios will become a reality.”
While some analysts see a gradual march back towards the “old normal” of office culture, other industry experts tout a much-trumpeted “hybrid” workplace model that is designed to support a distributed workforce of both in-office and remote workers.
“Preference for flexibility has grown, highlighting that hybrid work arrangements may be the way to go, with 90% of the 1,500 employees surveyed wanting to choose their working hours, or have flexible schedules,” adds JLL’s Allan. “This implies that hybrid work remains top of mind for employees and should be considered by employers if they want to attract and retain talent.” As the needs of occupiers evolve, the primary change we are likely to see in the office sector is the redesigning of spaces to make offices safer, healthier, and more sustainable.
Analysts, however, do not foresee a significant impact on the amount of space leased, as companies will be looking to use their workspaces differently.
They say there is likely to be a greater focus on using space better so workers are happier and more productive.
Companies—not to mention developers—will also be forced to up their game to create appealing and hygienic spaces for employees.
WITH ITS GREEN CREDENTIALS AND HIGH-TECH TRIMMINGS, THE PARQ IN BANGKOK EMBODIES MODERN OFFICE DEVELOPMENT
“In the future, offices will feel more like home,” says Ken Ip, assistant general manager and group head of marketing, B.S.C. Group. “There will be a lot in common between this new form of workplaces and domestic workspaces. Features of these environments will include improved cosiness, softened acoustics and more relaxed vibes.
“These can be achieved through furniture, specific fabrics and furnishings and even providing music in the workplace. Offices should let in more natural light where possible to give a homey ambience and be enhanced with improved air-conditioning systems for cleaner air quality or with open windows for increased ventilation.”
With these lofty visions of the workplace future doing the rounds, it’s little wonder that enthusiasm appears to be growing among employees for a return to the office. That’s good news for developers and investors in the sector, who can look forward to witnessing a resurrection instead of a burial.
“The office sector is supported by healthy market fundamentals, and we continue to see positive occupier sentiment across Asia Pacific,” concludes JLL’s Allan. “This gives us reason to believe that markets will steady over the coming months, and office conditions will stabilise before early 2022. We forecast rents will begin recovering in 2023.”
LATE TO THE PARTY
Filial piety and a lack of affordability in housing markets regionwide, exacerbated by the pandemic, are stymieing the buying ambitions of young property seekers around Southeast Asia
BY AL GERARD DE LA CRUZ
From the “Greatest Generation” to “Baby Boomers” to the “MTV Generation,” some demographic cohorts have worn their labels like badges of honour.
Those born between 1981 through 1996 got the short end of the baton: “Generation Rent.”
Generation Y has held a fascination for real estate pundits over the last decade. Witnesses to once-in-a-lifetime socioeconomic setbacks from the global financial crisis to today’s pandemic, so-called millennials have scaled the property ladder with less precocity than their forebears.
Delaying their homeownership goals until later in life, millennials are not “adulting” enough or so the old accusation goes.
Their little siblings are not exactly “Generation Buy” either. By 2020, Generation Z, those born from 1997 onwards, became the most populous generation in history at 2.47 billion even as a health crisis depopulated the planet (and diminished their job prospects).
Homeownership is even more elusive in Southeast Asia, a melting pot of ethnicities where more than half of the populace is younger than 30. But Generation Rent is not a fair assessment of the region’s youth—they haven’t left the nest in the first place. “Tight-knit family cultures, higher-thanaverage ages of a first marriage, and a lower rate of marriages mean that Southeast Asia’s millennial population have not felt as much pressure to move away from their families, compared to millennials in other parts of the world,” says Christine Li, head of research for Knight Frank Asia-Pacific. “The idea of ‘Generation Rent’ simply has not applied here.”
Filial piety still holds sway in Southeast Asia despite how progressive the last generations may have seemed. In a recent survey by PropertyGuru, the majority or 49% of millennials in Thailand and, to a lesser extent, Indonesia (31%) cite taking care of parents as the top barrier to moving out over the next year. In Singapore, being unmarried prevents most respondents (41%) from flying the coop, a social more echoed throughout conservative Asia.
SINGAPORE IS A SHINING EXAMPLE IN SOUTHEAST ASIA ON HOW TO GIVE THE YOUTH A LEG UP IN HOMEOWNERSHIP. HERE, PUBLIC HOUSING COVERS 80% OF THE POPULACE, WITH FINANCING READILY AVAILABLE
PROPERTY FOR THE PEOPLE
Singapore is a shining example in Southeast Asia on how to give the youth a leg up in homeownership. Here, public housing covers 80% of the populace, with financing readily available through the government’s Central Provident Fund (CPF) scheme and private banks.
“Even in Singapore, one of the most expensive markets in the world to own homes, homeownership level is still maintaining at approximately 88%, aided by robust governmental policies and public housing schemes,” notes Christine Li, head of research for Knight Frank Asia-Pacific. Around 46% of Housing & Development Board (HDB) flat owners have financed their home with a concessionary loan from the agency, according to a recent consumer sentiment survey by PropertyGuru. Saddled with inadequate cash flow, many millennials in Singapore choose the HDB concessionary loan to finance their mortgage over a bank loan because of the security and peace of mind the former brings. There is less interest for newly launched non-landed private property among younger Singaporeans, the survey further shows. Instead, resale HDB flats remain top choices for Singaporeans in their 30s and those in the 22-29 age group.
“On the supply front, cultivating a healthy secondary housing market is important,” says Li. “Supplementing the private supply with public housing schemes at subsidised rates to close the gap is also an important but frequently unpopular tool that can be looked into.”
Owning an HDB flat offers millennials a “place they can call their own, granting them more personal space and flexibility,” according to Tan Tee Khoon, country manager of PropertyGuru Singapore. “They are also likely to be prudent in their housing decisions, thinking long-term with plans like selling the flat after the minimum occupation period (MOP) to upgrade to private property.”
“Southeast Asia has traditionally never had a strong ‘rental culture,’ and most households have preferred to own their dwellings as opposed to renting,” says Li.
Still, the desire to move out remains strong among ASEAN youth. Even though up to 30% of millennials still report living with their parents in Singapore and Indonesia, as much as 84% of them still intend to move out over the next year, the survey shows. Thailand is an outlier at 42%, with most youngsters unwilling to leave the nest anytime soon.
The story of first-time homeownership is one of affordability. Although hyped as a fast-growing economic bloc to rival the EU, Southeast Asia suffers from some of the highest homeprice-to-income ratios of any region due to stagnating wage levels in developing economies, some destabilised by strife and autocracy. It also suffers from unsustainable capital value growth in some cities, boiled to a froth by speculative buying and low-interest-rate environments, especially during the pandemic.
“The ASEAN bloc has enjoyed a stellar economic growth over the last few decades, with countries such as Vietnam, Cambodia and Philippines experiencing the sharp rise of the middle-class population, which resulted in a shortage of affordable housing in many of the capital cities,” says Victoria Garrett, head of residential for Knight Frank AsiaPacific. Portents of a housing unaffordability crisis could make Generation Z the true heir apparent of the Generation Rent tag. “From what we have seen of Generation Z, social trends are reversing as more youths are desiring independence from their families,” says Li. “Despite trends of slower and fewer marriages, more individuals from Generation Z will seek opportunities to move out into their own pads.”
Millennials are built differently. Under immense pressure from social media, they have trailblazed the experience economy, given to frequent travel, eating out, and live events at the expense of tangible assets like a car or house. Millennials are not monikered the “Me Generation” for nothing.
One in three millennials looks to purchase a luxury home, or those priced above SGD5 million in the long term, according
to the PropertyGuru Singapore survey. Most justify it as a dependable long-term investment (66%) but 30% also cited “social status” as a reason to purchase.
“There is no doubt that millennials in Singapore are one of today’s fastest-growing segments of home buyers, with savings accumulated from pandemic sheltering,” states Tan Tee Khoon, country manager of PropertyGuru Singapore. “The delay in home buying can be due to millennials’ increasing preference for a larger, luxury property that commands higher prices than typical starter homes.”
Digital natives all their lives, Generation Z are torchbearers of the gig economy, favouring access over consumption. Where Generation X and millennials consumed status symbols and experiences, respectively, Generation Z consume the “search for truth” and prefer to make ethically, environmentally informed buying decisions, according to McKinsey.
True enough, young Asian home buyers tend to factor in good air quality, proximity to green spaces, and access to good healthcare in their choice of post-Covid residences, reports Knight Frank. A staggering 46% of millennials in Singapore
VIETNAM HAS EXPERIENCED THE SHARP RISE OF A MIDDLE-CLASS POPULATION, WHICH HAS RESULTED IN A SHORTAGE OF AFFORDABLE HOUSING IN HUBS LIKE HO CHI MINH CITY
LET’S STAY TOGETHER
Hyped as the best thing to happen to young property seekers priced out of the market, co-living has found some of its prospects floundering throughout the health crisis. The fixed costs of operating co-living spaces have turned exorbitant against the backdrop of pandemic-induced uncertainty; their core clientele of digital nomads have also shied away from travelling. Also, the notion of sharing communal spaces may be anathema to an era of safe distancing.
“Co-living is a relatively new concept and is still penetrating the market with a lot of room to grow,” notes Christine Li, head of research for Knight Frank Asia-Pacific. “Generally, co-living and its alternative residential typologies are considered an excess and a luxury and have mainly appealed particularly to expatriate crowds.”
But this could change soon. According to Knight Frank’s Global Buyer Survey 2021, 17% of Asian residents who have moved since the dawn of the pandemic have done so to live closer to loved ones.
“With the pandemic creating prolonged periods of isolation, the selling point of the community and shared spaces is accentuated,” says Li. “The growing student, particularly the university undergraduate, population, and the workforce for the burgeoning tech and financial sector in the region also contribute to the growing pool of demand for alternative living spaces such as co-living.”
Last year, co-living pioneer lyf announced 13 more properties to open in various cities from Bangkok to Melbourne to Xi’an through 2024.
“Co-living remains a great option for the budget-conscious millennials who may not be ready to purchase a property, but still want their own spaces or rightsize their housing needs,” says Tan Tee Khoon, country manager of PropertyGuru Singapore. “Coliving tenants stand to enjoy enormous savings by sharing common living spaces with a like-minded community.”
IT’S SUPREMELY DIFFICULT FOR ALL BUT THE MOST MONIED FIRSTTIME BUYER TO GET ONTO THE PROPERTY LADDER IN PREMIUM MARKETS LIKE HONG KONG
are willing to pay a premium to live in “green towns” or sustainable estates, reports PropertyGuru. Around one in three millennials is also willing to pay more for properties with EV charging points.
“The pandemic has put health and wellbeing into the forefront of younger generations’ consciousness when selecting new homes,” says Li.
Without the Bank of Mom and Dad, lower-income segments among young generations could only do so much without regulatory support. Tools to curb speculative buying like tax penalties, lower loanto-value (LTV) ratios, price controls, and tighter mortgage rules may spur first-time home buying for end-use, but they are not airtight measures.
“In South Korea…cooling the market only ended up locking the low- to middle-income groups from purchasing homes over the past three years,” warns Li. “This has impacted younger property seekers in particular, who are at the beginning of their careers and have yet to have built up resources for their first purchase.”
On the other end are property seekers who think housing policies are not warm enough. In Malaysia, only 16% of Malaysians perceive governmental efforts to make housing affordable as sufficient, reports PropertyGuru. Seventy percent of respondents called for further reduction of interest on home loans even as 46% of first-time homebuyers in their 30s expressed hopes of saving enough money to clear their debts.
“At the end of the day, as long as policymakers keep in mind the objective of the residential being for fulfilling one of our most basic needs, we will see the target of young buyers ascending the property ladder be achieved,” Li says.
Today’s youth will eventually come into money. Millennials stand to inherit over USD68 trillion from their parents by the year 2030, the greatest wealth transfer in modern history. With many families having accumulated wealth in property, the desire for homeownership will surely live on through the years.
“Property ownership in Asia has always been aspirational, and I don’t see this changing in the future,” says Garrett.
YOUNG ASIAN HOME BUYERS TEND TO FACTOR IN GOOD AIR QUALITY, PROXIMITY TO GREEN SPACES, AND ACCESS TO GOOD HEALTHCARE IN THEIR CHOICE OF POST-PANDEMIC RESIDENCE
GENERATION BUY
While their Southeast Asian and American counterparts were struggling to climb the property ladder or toiling to pay off crippling student loans, millennials in China were buying their first homes— in droves. An estimated 70% of Chinese aged 19-36 own a home, one of the highest homeownership ratios in the world, according to HSBC’s first and latest Beyond the Bricks study.
“In China, the ability to purchase a home at a young age symbolises success and buying a home is often seen as an important and sensible financial investment,” says Victoria Garrett, head of residential for Knight Frank Asia-Pacific. “Many from this segment find real estate a haven asset compared to other investment classes.”
Young Chinese property seekers have fanned out from the mainland and scoured Southeast Asian markets for suitable investments in recent years. Most were attracted to the neighbouring region’s low barriers to entry and good returns. “Pairing with their governments’ imposition of restrictions on domestic real estate transactions, it is easy to see the reason why they look at the overseas property market and become the target for many Southeast Asian developers,” says Garrett.
Southeast Asian markets are widely popular among the new generation of cashed-up Chinese home buyers for other reasons. In developed economies like Singapore, for example, they are attracted to great access to medical care; secure infrastructure for both living and working; and positive capital gains.
The lure of a low investment threshold, as well as freehold land and homeownership, also makes countries like Malaysia, Thailand, and Cambodia popular bets for the Chinese. Adds Garrett, “With rapid urbanisation of these less developed countries, land prices can only rise, which will, in turn, drive property prices to go up.”
Dispatch
Will the centre hold?
Worries surrounding debt-strapped property developer China Evergrande have put investors on guard for evidence that the crisis may be spilling over into broader markets
By Steve Finch
Following a meeting between central government officials and Evergrande Group senior executives in Beijing in late August, Chinese regulators kept silent on the developer’s impending debt crisis for weeks.
Finally, in mid-October, central bank governor Yi Gang said the problems facing Evergrande “casts a little bit of concern”, but added: “Overall, we can contain the Evergrande risk.”
China, of course, is one of the world’s most expansive nations. Yet narrowly defined narratives like Yi’s—particularly during a crisis—often set the tone in the country.
CHINA EVERGRANDE HAS STRUGGLED TO MAKE REPAYMENTS ON ITS STAGGERING USD300-BILLION MOUNTAIN OF DEBT AND HAS FAILED TO SELL ASSETS QUICKLY ENOUGH TO KEEP CREDITORS HAPPY
Chinese regulators have since made sure to defer to the same watchword— “controllable”—in describing Evergrande’s increasingly urgent debt burden.
A headline in the nationalistic daily Global Times perfectly captured Beijing’s official stance: “More bond defaults likely for Chinese real estate companies, but the overall situation will be stable.”
Half of the central government’s battle will be convincing investors and consumers that everything will turn out just fine: not least to prop up flagging confidence. But most analysts agree that things will get considerably worse before getting better.
Dispatch
MOST ANALYSTS AGREE THAT THINGS WILL GET CONSIDERABLY WORSE BEFORE GETTING BETTER. INDEED, SOME BELIEVE THAT EVERGRANDE’S DEBT REPAYMENT PROBLEMS COULD TURN INTO A FULLBLOWN FINANCIAL CRISIS IN CHINA, AND POSSIBLY BEYOND ITS BORDERS
Indeed, some believe that Evergrande’s debt repayment problems could turn into a fullblown financial crisis in China, and possibly beyond its borders.
Evergrande’s litany of woes is extensive. It has struggled to make repayments on its staggering USD300-billion mountain of debt and has failed to sell assets quickly enough to keep creditors happy.
Rare tidbits of good news, meanwhile, have been drowned out by something worse. When its suspended shares started trading again in Hong Kong in late October, Evergrande also announced that the potential USD2 billion-plus sale of a banking unit had fallen through.
Media reports suggest Chinese authorities have asked Evergrande founder Hui Ka Yan to use his considerable wealth to pay off debts.
Yet Hui has lost 70% of his fortune over the past year amid Evergrande’s debt crisis, meaning his assets are reportedly down from USD46 billion to USD11 billion.
His fortune could help meet short-term bond repayments, but Hui’s dwindling personal wealth now accounts for less than 4% of the money owed by his company.
Transparency concerns remain, especially regarding the identities of the company’s many investors. And these are the dominos expected to fall should debt repayments stall further. “We simply don’t know who many of Evergrande’s investors are,” said Marco Metzler, a former Fitch analyst ahead of the release of a report he co-authored for the German Market Screening Agency warning Evergrande’s woes could lead to the next global financial crisis. “There could still be some negative surprises here.”
Metzler’s analysis lies at the least optimistic end of the spectrum of views on the embattled Chinese property company. But pessimism is widespread.
Central bank governor Yi’s comment in October that Evergrande “is an isolated case” appears increasingly far from the mark.
The same month, luxury apartment developer Fantasia Holdings defaulted on bonds worth USD206 million, so too did Hong Kong-listed Sinic Holdings to the value of USD250 million, and China Properties Group on USD226 million of debt.
Beijing developer Modern Land said in October it needed more time to repay a USD250 million bond. “[Defaults] are leading to a deterioration in consumer confidence and reducing interest from prospective buyers,” BCA Research said in a note in late October.
Are these signs of an Evergrande contagion starting to spread? Overseas bond defaults have reached the highest level since records started in 2018, some to around USD8.7 billion, with 34% in the property sector, according to Bloomberg.
Dispatch
The ‘big three’ ratings agencies—Moody’s, Fitch, and S&P—slashed Chinese developers’ ratings a combined 91 times in the first nine months of this year, another record. And that was before a series of further such cuts the following month.
Hong Kong-listed Kaisa Holdings saw its rating cut in late October by Fitch which followed rating cuts by Moody’s against Chinese property firms Yango Group, China Aoyuan, Greenland Holdings, R&F Properties, Shinsun Holdings and Zhongliang Holdings all in the space of less than one week, a further sign that debt problems may be speeding up in China’s property sector.
Recent liquidity problems follow a surge in aggressive borrowing in the sector between 2016 and 2018, a period in which China has become faraway the world’s leading private borrower with a ratio of well over 200% of GDP.
Many of China’s property sales are advance purchases and down payments before units are built, and there are now growing signs that confidence is waning among Chinese homeowners. In September, China’s new home prices fell for the first time in six years, while the real estate sector shrank 1.6%
IN SEPTEMBER, CHINA’S NEW HOME PRICES FELL FOR THE FIRST TIME IN SIX YEARS, WHILE THE REAL ESTATE SECTOR SHRANK 1.6% AND CONSTRUCTION 1.8% IN THE THIRD QUARTER
and construction 1.8% in the third quarter, according to official data from China’s National Bureau of Statistics.
The central government is now starting to reverse recent efforts to cool the overheating sector after house prices rebounded too quickly following pandemic lockdowns initiated across the country in early 2020.
Analysts reported borrowing costs for home loans being reduced in China from October. “The first signs of easing policies are emerging after weak property sector sales numbers were released,” says Cheng Wee Tan, a senior equity analyst at Morningstar.
Forecasts for China’s property sector are grim. S&P forecasts a 10% drop in residential sales in 2022, and a similar slide again the following year. “China’s property market is known for its boom-and-bust cycles, but the current, contagion-tinged downturn is unusually intense,” it said.
