As the real estate market in China moves downward, the debt risks of many real estate companies continue, with several local governments currently taking measures to salvage the situation.
On August 31, Jinan City Development Group's assets operation management company issued a tender announcement to acquire 9,000 existing housing units within the urban area of Jinan for leasing and reserve housing. The housing requirements are "reasonable layout, complete supporting facilities, complete procedures, and quality assurance”.
Such an act, on the one hand, is for reserving public housing, on the other hand, it is actually resolving the difficulties faced by many housing companies. Previously, on July 1, Zhengzhou Real Estate Group announced Henan Zhengdi Housing Leasing Co., Ltd.'s acquisition of stock housing for talent apartment projects (first batch), and started the acquisition of stock housing for talent apartment projects. Zhengzhou's urban investment platform has acquired a large number of housing stock in the market, and its significance is to underpin the city’s property market. Other than Jinan and Zhengzhou, more and more cities have joined the direct assistance to the local real estate market.
Looking at the overall situation, the real estate market across the country is still showing a downward trend. According to data from China’s National Bureau of Statistics (NBS), from January to July, the sales area of commercial housing was 781.78 million m2, a year-on-year decrease of 23.1%, of which the residential sales area decreased by 27.1%. The sales of commercial housing were RMB 7,576.3 billion, a drop of 28.8%, whereas the sales of residential buildings fell by 31.4%. At the end of July, the area of commercial housing for sale was 546.55 million m2, a year-on-year increase of 7.5%. Among this figure, the residential area for sale increased by 14.1%. In a single month, the sales area in July was 92.55 million m2, a decrease of 49.1% month-on-month and a year-on-year decrease of 28.9%. The sales amount was RMB 969.1 billion, a drop of 45.4% month-on-month and a year-on-year decrease of 28.2%.
In terms of price, under the circumstances where there is an overall decline, the differentiation of the real estate market at different levels is intensifying. According to statistics from the NBS, residential prices in 70 cities in China show that in July, the sales prices of new commercial housing and second-hand housing in first-tier cities rose by 3.1% and 0.9% year-on-year, respectively., Meanwhile, second and third-tier cities of the country showed an overall downward trend. Among them, sales prices of newly built commercial housing and second-hand housing in third-tier cities fell by 3.2% and 3.9% year-on-year, respectively. When it comes to new urban housing, the housing prices in Zhengzhou fell by 3.9% year-on-year, Dali fell by 5.8%, Nanchong fell by 6%, Qinhuangdao fell by 5.7%, Harbin fell by 6.8%, Xiangyang fell by 4.4%, and Luzhou fell by 6.1%. Based on the trend of second-hand housing in 26 provincial capital cities (with the exception of Lhasa) in the past three years, some media reports noted that prices of second-hand housing in 22 provincial capitals were lower than one year ago, 13 lower than in the same period two years ago, and 10 lower than the same period three years ago. On the whole, capital cities such as Chengdu, Guangzhou, Haikou, Hangzhou, and other provincial capitals are at the forefront of housing price growth. The cities that have fallen in the past three years are mainly concentrated in the Northeast and the North, as well as the Yellow River Basin, in addition to Guiyang in the Southwest, and Nanchang in the middle reaches of the Yangtze River. Outside the provincial capital, housing prices in prefecture-level cities and county-level areas in these regions may have fallen even more seriously.
While more and more localities have taken measures to reduce interest rates and down payment ratios, as well as increase subsidies, it remains challenging to stimulate market demand for housing in the case of a downturn in the housing market, the ongoing COVID-19 outbreaks, and the halt of some housing projects. Furthermore, because of the pressure caused by the pandemic and the economic slowdown, the income of residents has been affected. Due to unstable income expectations, many have adopted a wait-and-see attitude towards the housing market. In areas like Jinan, Zhengzhou, and other places, this is taken over by urban investment, so as to prevent the collapse of the local housing market. The acquisition of urban investment companies also means that various indirect sales promotion policies have been unable to work under unstable expectations. Urban investment in various places is closely related to local governments, especially in the case of the real estate market, where it is directly related to local fiscal revenue. In the first seven months, the land purchase area of real estate development companies was 45.46 million m2, a year-on-year decrease of 48.1%. The land transaction price was RMB 291.8 billion, down 43%. Since the beginning of this year, the land income in various places has fallen sharply, and the financial and debt pressures of some places are increasing. It is, therefore, reasonable for the local urban investment to stabilize the housing market.
Recent adjustments in credit and interest rate policies have brought some improvements to the real estate market environment. The Chinese central government has repeatedly emphasized that reasonable demand for real estate will be ensured. At the same time, it is also actively promoting the mergers and acquisitions of problematic housing projects, in order to avoid the occurrence of the halt of construction and supply. These overall policies do contribute to the alleviation of the overall downturn in the country’s real estate market, helping it to properly bottom out. However, real estate is geographically specific. While there will not be an overall collapse, some places may be more affected than others, and a regional local collapse may occur in a market downturn.
Noteworthily, in the process of constantly searching for the bottom of China’s real estate market, various systemic risks brought by the market are constantly accumulating. The closer it gets to the bottom, the greater the risk there will be. This is especially in some third- and fourth-tier cities, in which under the circumstance of population outflow and weak economic growth, not only there is a large number of stock problems have accumulated in the early stage and difficult to clear up, but also due to factors such as project shutdown, unfinished constructions, and supply interruption, a catastrophic decline in the market might eventually occur. To this end, some localities have adopted price limit policies, yet it may still be difficult to change the downward trend of the market. What is needed is more actual investment to ensure housing prices and stabilize the market.
The stability of the real estate market not only involves the direct interests of real estate companies, buyers, and suppliers but also affects the stability of local fiscal revenue. This, in turn, will impact local financial institutions and financial markets, as well as local industries and businesses. The financial risks brought about by the collapse of a local housing market in one place will first cause risk contagion within financial institutions, further spreading to the whole bank, and then triggering the contraction and adjustment of other financial institutions. When this happens, the capital market will be turbulent. The social unrest that ensued can also be contagious. A city's property market problems might be resonating across the country, triggering imitation by other investors and consumers. This potential risk is what worries the real estate market the most.
In such a situation, the participation of local urban investment in urban development and service functions to rescue the market not only reflects the main responsibility of the local governments in risk prevention but also brings opportunities for the substantiation of urban investment. Under the general trend that the public attributes of real estate will become stronger, the roles and responsibilities of urban investment companies in the real estate sector will also become more distinct.
Final analysis conclusion:
The participation of urban investment companies to "rescue” the housing market may become an option for more and more localities in China. Because of the regional nature of the real estate market, in the process of the market gradually bottoming out, the possibility of a partial collapse in certain regions will increase. If such a risk gets out of control, it will continue to spread and may bring about a comprehensive systemic risk to the country.
