CHINA CRISIS BUILDS

SPLUTTERING DRAGON

Confidence has drained from China’s residential market with prices dropping and the central bank slashing rates to 14-year lows. But signs of recovery can be spotted in Beijing and a handful of large cities in the country

BY STEVE FINCH

The second phase of Juiyu Dragon City, a residential development in Zhengzhou, was supposed to have been completed by the end of 2019. That was the date developer Henan Jiuyu Real Estate Development Company Limited told new residents they could move in. Most had made substantial down payments to the developer, and many secured mortgages with banks.

In July 2020, after more than half a year of delays, a prospective resident noticed workers dismantling scaffolding at the site of the seven 20-storey buildings and filed an online complaint with the city government in a bid to ascertain when the project would be completed. After numerous similar complaints, and despite local government reassurances, two years later the project has still not been finished, leaving residents unable to move into their new homes for nearly three years.

In July, stranded buyers of apartments at Juiyu Dragon City joined forces to issue a warning that they would begin a boycott of their mortgage repayments the following month.

“The owners of Juiyu Dragon City have defended their rights many times,” it read. “But no substantial progress has been made so far.”

Juiyu Dragon City is among at least 44 housing projects in Zhengzhou to have witnessed mortgage boycotts by angry

SCORES OF DELAYED NEW PROJECTS IN THE CITY OF ZHENGZHOU HAVE WITNESSED MORTGAGE BOYCOTTS BY ANGRY PROSPECTIVE RESIDENTS

LAND SALES SLIDE

China witnessed a drop of more than 40% in land sales revenue transfers in July compared to a year earlier, a sign that developers are spending less on adding to their land banks in a bid to shore up liquidity, according to Fitch Ratings.

The continued sharp drop in land sales across China is among the strongest indicators that the number of new projects and overall supply are likely to recede sharply in the short to medium term amid the ongoing slump in the real estate market.

Among the worst performers on new land sales were Shenyang and Changchun, two of the largest cities in northeastern China, which saw land sales revenue transfers plunge 90% in July compared to a year earlier, according to central government data.

The best performers were China’s largest city Shanghai, and the province of Sichuan whose capital Chengdu ranks as the fifthlargest city in China in terms of population, a further sign that the biggest tier-1 cities are riding out the ongoing downturn better than smaller provincial cities classed as tier 3 and tier 4.

Market confidence has remained more resilient in Chengdu and Shenzhen, large cities which have held land auctions more frequently than most amid a new land sales format introduced by the central government last year which caps the number of such events to just three per year. The new policy was launched originally to curb last year’s runaway prices amid what appeared to be a stronger-than-expected post-pandemic rebound which has since reversed into China’s worst housing market crisis in years.

Sharply falling sales indicate that ordinary Chinese buyers have grown wary of paying upfront for properties before completion, thereby starving developers of new funds with which to acquire land and build new homes

residents, more than any other city in China. More than 330 residential developments have seen similar protests across the nation as the economic downturn has impacted millions of ordinary Chinese.

Mortgage boycotts represent the most visible sign yet of a property crisis in China as developers fail to complete projects paid for in part by ordinary buyers, causing a drain on confidence across the sector — and increasingly the national economy.

House prices in China’s largest cities fell for the tenth straight month in July, including in Zhengzhou where new homes fell 3.6% compared to a year earlier, according to central government data. Smaller cities have fared worst. Beihai, a beachside city in Guangxi province close to China’s border with Vietnam, has been the worst performer among the country’s largest cities with 8.8% wiped off new home prices in a year.

“In the past decade it could not be imagined that so many projects in tier-one cities or provincial cities would be so delayed,” says Regina Yang, head of research at Knight Frank in Shanghai. “The imbalance in supply and demand in many cities has pushed the market to reduce inventory—and prices continue to drop.”

Almost every indicator of China’s property sector has sounded the alarm in recent weeks. The National Real Estate Climate Index, a composite of indicators including investment, capital, and sales published by the National Bureau of Statistics in Beijing, fell off a cliff in January and has since fallen well below 100 points at 95.26. Any reading below 100 points to negative sentiment trending across the sector.

In the first half of this year, sales for China’s 100 largest property developers fell 50%, according to data from China Real Estate Information Corporation. In August, China’s largest developer by sales, Country Garden, warned that profits in the first half of the year fell by up to 70%, “caused by the downturn in the market and slowdown in construction progress”. Sharply falling sales indicate that ordinary Chinese buyers have grown wary of paying upfront for properties before they are completed amid growing delays, thereby starving developers of new funds with which to acquire land and build new homes.

After the number of projects facing mortgage boycotts across the country surpassed 300 in late July, China’s main policymaking body, the Politburo, urged local governments to take responsibility for completing delayed developments. Since then, Beijing’s response has been swift. A RMB-300 billion (USD44 billion) rescue fund led by the Construction Bank of China was created in late July. And in mid-August, banks announced a RMB 200-billion (USD29

THE BEACHSIDE CITY OF BEIHAI IN GUANGXI PROVINCE HAS BEEN THE WORST PERFORMER AMONG CHINA’S LARGEST CITIES WITH 8.8% WIPED OFF NEW HOME PRICES IN A YEAR

DEVELOPERS TURN TO GROUPTHINK

Developers in China are attempting to spur home sales by offering special new discounts for groups of buyers, among the more innovative attempts to boost sales amid ongoing difficult market conditions.

This new sales technique was first seen in Taiyuan in early June and has since been copied in Zhongshan, Shenyang, Tonglu, Tongling, and then Pu’er, the small Yunnan province city famous for its tea. The practice has become particularly popular in smaller cities which have borne the brunt of the recent property downturn. Developers in these cities have typically offered discounts of at least 3% on the sales prices of real estate units by groups of more than 20 people. Some of these special discounts also offer reductions for purchases of multiple properties, including 5% on more than 20 units in the same development. It remains unclear whether these innovative new sales promotions have had any bearing on sales, and some cities have expressly prohibited such practices.

Among those are Sanmexia City and Zhengzhou, both in Henan province which has witnessed the largest number of mortgage repayment boycotts in the country. The municipal governments of the two cities both said they opposed stateowned organisations or companies organising group purchases of apartments. In other cities, developers have specifically targeted state institutions, including university staff, in the hope of boosting unit sales.

billion) fund for distressed construction projects which could be turned into social or rental housing. A few days later the central bank slashed minimum mortgage rates to just 4.1%, the lowest in 14 years. Analysts including ING said they expect more rate cuts by the end of the year if China’s housing market continues to struggle.

“At present, though policy support is increasing, follow-up mainly needs to repair market confidence,” says Lu Ming, northern China director of research at Colliers.

Although Beijing has shown a growing willingness to intervene, there are few signs of a market recovery, and bright spots are limited. Only the country’s very largest cities have bucked the downward trend.

Shanghai, Beijing, and Guangzhou all recorded modest price growth in July compared to both the previous month and a year earlier, according to central government data. Beijing saw prices increase more than 4% in the year before July 2022. The very top of the market performed poorly with highend apartment volume decreasing in the second quarter by more than 17% compared to the period January to March as prices fell slightly, according to Savills China.

Yet new residential supply volume overall soared 164%, and transactions also increased nearly 20% in Beijing during the second quarter of this year. The capital has remained relatively untouched by mortgage boycotts with just three impacted developments reported so far, and only one in central Beijing. A recovery was already underway in the Beijing residential market in the second quarter, according to Savills in its market update for the capital released in July.

“Despite the resurgence of the epidemic that continued to dampen the economy, the first-hand residential market performed better than the last quarter,” says Vincent Li, a director of research for North China at Savills. “Both supply and demand [were] seen to be improving.”

BEIJING HAS BEEN AMONG THE FEW LOCATIONS IN CHINA TO AVOID THE REAL ESTATE SLUMP WITH PRICES INCREASING THIS YEAR, ALBEIT LESS IMPRESSIVELY THAN BEFORE

PING AN STAYS THE COURSE

The world’s largest insurance company, Ping An Insurance, has announced it plans to continue to build its property portfolio despite the problems afflicting the sector. In an announcement to investors at the end of August, Ping An said it would seek out high-quality real estate assets including commercial property in logistics and data centers.

“Property is a comprehensive reflection of the macro economy at this moment and as long as we speak with the principle that property is for living, not for speculation, I believe that our property market in China will have a bright future,” says Benjamin says Deng, chief investment officer at Ping An, echoing Chinese leader Xi Jinping.

Although Ping An is classified as a civilian-owned rather than state-owned enterprise under Chinese law, among its largest shareholders is the Shenzhen city government, and the company is steered in part by the central government.

Nonetheless, the company is listed in Shanghai and Hong Kong and remains beholden to its shareholders, meaning any endorsement represents good news for the beleaguered property sector. Following impairments related to indebted developer China Fortune Land which cost Ping A RMB18.2 billion (USD2.8 billion), the insurer announced in late August that it had not recorded any write-downs related to the real estate sector in the first half of 2022. “All of the risks are well under control,” said Deng.