Chinese property developers hold their breath… | FT Alphaville

Chinese property developers hold their breath…

The adjustment in property markets is welcome, but given the significance of the sector in the overall economy, continued vigilance will be required to contain negative spillover effects.

That’s from the World Bank’s new China quarterly report, which downgrades 2012 GDP growth to 8.2 per cent from 8.4 per cent.

Some of those spillover effects would have already been felt by Hangzhou Glory Real Estate, perhaps one of the first Chinese property developers to be seeking bankruptcy protection. As one local analyst told the WSJ, the blue chip developers “should be safe for now”:

Analysts said the financial woes of Hangzhou Glory Real Estate Co., a small developer, won’t drag down other firms in the hard-hit property sector. But they said that other weaker players could see similar strains.

A big wave of bankruptcies could be messy. Despite downgrading its 2012 growth forecast, the World Bank is predicting a good chance of a soft landing for China, with a weak recovery in growth momentum expected to take place in 2013.

… as long as the property bubble doesn’t burst too hard:

The sector has important linkages to upstream activity such as cement and steel. It can influence the finances of  industrial enterprises which engage in property development as a side  business. Local governments have derived major revenues from the sale of land use rights to property developers.  Thus, a more amplified downturn could  have negative economy-wide impacts. Given the length and variability of policy lags and uncertainties about possible counterinterventions, the future trajectory of property prices remains unclear.

Property construction was responsible for about 13 per cent of GDP in 2011, and more than a quarter of investment — so it matters a great deal to the overall figure. The central government appears determined to maintain its cooling — and anyway, it appears to have decreasing ability to control the economy the way it once did.

Stephen Green and colleagues at Standard Chartered have carried out several surveys of a panel of 30 housing developers in tier 2 and tier 3 cities. The most recent of which – carried out in February and March, after the lunar new year – gives a mixed view: developers showed some signs of optimism in comparison to the previous survey published in late November, but their impressions of financing problems in the industry had worsened.

Tier 1 cities  are  leading the correction in  primary  prices (Chart  2). The price correction in Tier 2 cities appears to have  now also begun. Average selling prices (ASPs) in Tier 3 cities appear steady. That said, we know that  local governments have ways  to distort official price indices – by refusing to grant sales permits for high-end projects, for instance – so these averages are not completely reliable. (As we show in our survey, though, prices are indeed likely now falling.)

Construction activity seemed to have picked up a little since the previous survey in late November, with 14 of the 30 developers surveyed saying they were building more than the previous quarter, while only nine said they were building less. But while this is good news for some of the developers, is this necessarily a good thing for the economy when inventories are building so fast?

China property inventories - 35 cities - Standard Chartered

However, the survey responses to sentiment suggest it’s not getting dramatically worse, and in fact more developers are reporting an improvement in sales than the previous survey. The numbers on developers who were aware of auction payment failures, for example, had fallen — but perhaps that’s just because there were more failures at government land auctions?

However, there is certainly more confidence, although that appears to be at least partly due to price cuts:

property developers' confidence - Standard Chartered survey

And as for social housing, this is a big part of the central government’s mini-stimulus plan and a cornerstone of some bullish forecasts for China. Seven million new starts were planned for 2012, but that seems to be going nowhere fast. Most of the developers surveyed believe “between zero and 30 per cent” of the “social housing projects” in their respective main cities were actually “new”:

China developers' survey - Social housing - Standard Chartered

Meanwhile, the survey respondents’ answers on financing were far from reassuring:

China developers survey - financing - Standard Chartered

We’ve read (via Anne Stevenson-Yang) that PBOC data shows that trust loans have risen more than 10-fold in the space of a year, when the January-February periods are compared. The same PBOC figures show that total financing fell by 17 per cent.

A note from HSBC late last year suggests that developers might be responsible for a big chunk of the growth in trust loans:

The HSBC data, incidentally, only includes large Chinese developers with offshore bond issuance.

Related links:
China’s Real Estate Bubble May Have Just Popped – Foreign Affairs
Social housing won’t fix China’s economy – beyondbrics
Chinese property: A lofty ceiling – FT
China’s worried local governments – FT Alphaville