@Pixabay.
China’s property and real estate sector has seen a rollercoaster of ups and downs in recent years – and especially post Covid reopening and into the spring of 2023.
However, the future of the sector is now looking brighter, said multiple sources, with house prices expected to rebound and sales to increase in H2 2023. If these predictions come to fruition, there could be new opportunities for investment teams at insurance firms in the Chinese real estate market.
Facilitated by the Chinese government, the world’s second largest economy saw its property and real estate sector grow immensely in the decades before Covid – largely due to a significant migration of citizens from rural to urban areas for increasing job opportunities in city factories.
Buying and investing in their homes, this immense urban population more than doubled from around 415 million in 1998, when the housing reform began, to more than 900 million in 2022. The number of Chinese citizens currently living and working in cities greatly outnumbers those in rural areas – and the property sector has anchored China’s economy since.
Comprising over 20% of the country’s economy, real estate, land sales, and construction were – until the recent 2020-2022 Evergrande saga – mainstays for those investing in China over the last two decades. Government bailouts have since saved the $571.9 billion company, which had liabilities of $300 billion in 2022, after its default.
Numerous issues have stalled growth in the past few years. Most significantly, these include 2020 debt limit regulations, developer debt defaults and the postponed construction of previously sold and closed housing projects.
The country’s economic reopening in late 2022 – dovetailed by the lifting of stringent Covid restrictions – was seen as a chance to boost momentum and return to an earlier era of growth. Pre-sold developments could begin to be constructed, and the Chinese consumer would have renewed purchasing power given easing restrictions.
“There is increasingly a consensus in Beijing that China’s excessive reliance on
surging debt has made the country’s growth model unsustainable.”
In late 2022, estimates ranged from $2.5 trillion for the new-home market to around $52 trillion for existing homes and inventory. By comparison, China’s property sector was twice the size of that of the US in 2019. Much of this economic enormity, however, relied on debt.
“There is increasingly a consensus in Beijing that China’s excessive reliance on surging debt in recent years has made the country’s growth model unsustainable,” said Michael Pettis, Senior Fellow and Professor of Finance at Peking University, in an analysis for the Carnegie Endowment for International Peace.
Data from China’s National Bureau of Statistics, for example, revealed that real estate development investment declined by 7.4% from January to August 2022 – which is one percentage point more than the first seven months. Commercial housing sales totalled around $1.2 trillion, down 27.9%, whilst residential sales decreased by 30.3%, said the National Bureau.
For many investors, these statistics only highlighted the inevitable demise of over-leveraged property developers and the collapse of housing projects.
For investment teams at insurers, this fundamental market instability means a once bullish opportunity has since fallen completely flat. It remains to be seen if stabilisation in the property sector is truly on the horizon – and, furthermore, if said stabilisation is indeed sustainable in the long term.
He believed that the “draconian zero Covid policy” was mainly
to blame for stalled markets”.
Rob Brewis, an Investment Manager at the Edinburgh-based Aubrey Capital Management, said that he believed that the “draconian zero Covid policy” was mainly to blame for stalled markets – adding that it had “sucked the life out of the Chinese economy”.
Larger macroeconomic issues were also at play – such as problematic relations with the US, supply chain changes, inflation, and a generally slowing world economy. Renewed purchasing power from the average consumer, however, would likely reinvigorate markets, he continued.
This sentiment echoed earlier comments from James Pomeroy, Global Economist at HSBC, who postulated that China’s reopening had the “potential to be massive” – due to Chinese consumers’ pent up appetite for spending.
A recent Fitch Ratings report noted that there were apparent signs of stabilisation in China’s property market, but the exact timelines were unclear and not all stakeholders would be beneficiaries. For example, those undergoing debt restructuring would have difficulty benefitting from a post-Covid economic recovery. Critically, the report said it did “not expect stabilising sales to drive a material recovery for defaulted developers.”
However, state-owned enterprises and non-defaulted private developers were included amongst those who had the most to gain if momentum was sustained. This was due to their more robust capacities to launch new projects and provide additional properties for sales.
Still, Brewis – along with the recent Fitch report and insights from CBRE’s 2023 China Market outlook – were not willing to dismiss the sector just yet. Whilst a complete, material recovery in real estate markets might be wishful thinking, each party reported faith in economic recovery based on domestic consumption, alongside clearer fiscal and monetary policy.
“The active fund-raising environment will also provide liquidity for
commercial real estate investment.”
The CBRE report pointed toward low interest rates and an active fundraising environment as possible motivating factors. “Low interest rates will provide a sound foundation for a rebound in the capital markets this year, while the active fund-raising environment will also provide liquidity for commercial real estate investment,” it said.
The report added that CBRE expected commercial real estate investment volume to increase by 15-20% year-on-year. For Brewis, this meant investing in the Chinese consumer, especially once savings from recent years had been leveraged. “This will be a much more favourable backdrop for our consumer companies who are now very cheaply valued,” he said.
For investment teams at insurers, the uncertainty around this supposed stabilisation could mean keeping eyes open and ears peeled for opportunities – whilst still remaining cautious about investment options. Non-defaulted private developers look easily most appealing at the moment, but policy shifts – along with added debt investment – could mean unexpected volatility.
“Insurers should adjust their lending and investment policies to support
energy saving, pollution and disaster prevention.”
According to James Chan, an Associate Director at global ratings agency AM Best, this meant tentative opportunities at the intersection of property and greener investments – especially after the local industry regulator, the China Banking and Insurance Regulatory Commission (CBIRC), published “Issuing the Green Finance Guidelines for the Banking and Insurance Industries” in June 2022.
These opportunities could reference new developments in real estate and ESG investing, as discussed in the 2022 report “Creating sustainable value: Real Estate and ESG”, published by Deloitte China. The analysis outlined three key international practice aims for the real estate sector: 1) optimising the use of resources, 2) reducing waste and emissions, and 3) extending asset lifespan with a circular economic approach that can allow for cash-flow elongation.
A more sustainable property sector could be the answer to recent investor concerns about unfettered – and unsupportable – growth.
“Banks and insurers should adjust and enhance their lending and investment policies to support energy saving, pollution and carbon emissions reduction, green growth, and disaster prevention in key sectors and fields, and promote the application of green and low-carbon technologies,” Chan said.
Whilst the property slump appears to be easing, the longevity of this rebound remains uncertain. Despite recent chatter, broader concerns around the sustainability of China’s growth model leave much to be desired for eager investors.
