_What to expect in the year of the Dragon for China real estate

China has had its fair share of negative news over the past year.

Its economic growth momentum had slowed from the second quarter of 2023, with its Gross Domestic Product (GDP) falling below market expectations, sparking concerns about the health of the country's economy.

In December, the prices of new homes in China fell at their fastest pace since February 2015, extending a persistent downward trend for the sixth consecutive month. The sector continues to struggle to get back on its feet due to weak confidence in the economy. Among the 70 cities covered in China's home price data, 62 registered declines, marking a rise from 59 cities that reported losses in November. Sales of China's top 100 developers dropped a substantial 17.3% in 2023, signalling a shift towards prioritising capital preservation over aggressive expansion strategies.

Furthermore, real estate investment plummeted 9.4% in the first 11 months of 2023 compared with the previous year, and private investment remained on a downward trajectory.

Compounding these challenges, China’s benchmark indices reached a five-year low last month, indicating a loss of trust in the US$9 trillion stock market.

China's post-COVID reopening fails to ignite its economy

While China's overall GDP growth for 2023 exceeded expectations at 5.2%, as reported on January 17, 2024, market participants remain cautious due to the ongoing challenges in the property market. The real estate sector has traditionally been a significant driver of economic growth in China, and its recent struggles have raised concerns about the sustainability of the country's economic recovery.

The prolonged downturn in the housing market has also significantly impacted consumer sentiment, as real estate is often a major component of an individual's net worth. This decline in home values has led to a perception of diminishing wealth among consumers, affecting their confidence and willingness to spend. While the GDP growth may be a positive sign, the challenges facing the property market are weighing on the sentiment and performance of the economy.

Depreciation in property value

The impact of the economic slowdown is also felt in the private sector, as deglobalisation and supply chain diversification have reduced orders from Western countries, primarily from US companies, leading to layoffs and downsizing in many companies. This has introduced additional uncertainties in the employment prospects, contributing to insecurity and instability in the labour market.

While household defaults have yet to materialise, certain large developers are teetering on the edge of default. In contrast to prior housing downturns, where policy easing led to swift rebounds, the current market may not respond as favourably due to changing economic dynamics. The government may need to address mismatches in supply and demand, ease restrictions, and implement aggressive measures to stimulate a revival in the property market.

While concerns about a "Lehman moment" are limited, given the government's ability to intervene and support the financial sector, a growing divergence between upper and lower-tier markets is expected to widen. Restructuring debt-laden property developers and ensuring the delivery of purchased homes are crucial steps to turning the market around.

The recent liquidation court order in Hong Kong liquidation regarding Evergrande signifies a positive stride. China's choice to allow Evergrande to face consequences marks a significant shift in its strategy, indicating a recalibration in both the real estate market and the economy. Prioritising the restructuring of heavily indebted property developers and guaranteeing the completion of homes already sold are crucial measures to initiate a positive transformation in the market.

China is also facing demographic challenges in the coming years. In 2022, China's population declined for the first time in decades, which is expected to continue in the coming years, putting a strain on social and healthcare systems.

Amid these hurdles, specific opportunities and trends are influencing the trajectory of the Chinese residential market.

In the area of public housing development, the Chinese government strongly emphasises the construction of public housing, including public rental housing, as part of its goal of achieving "common prosperity”. The initiative to develop 6.5 million homes for leasing purposes in major cities by 2025 presents market growth opportunities and addresses housing affordability concerns.

Within the multifamily sector and commercial real estate investment trust (C-Reit) market, China’s swift expansion in rental apartments offers opportunities for institutional investment and significant growth in the multi-family sector. This development could help resolve longstanding challenges and potentially position China as the largest institutional residential market globally.

The government's focus on supporting reputable developers and implementing measures to stabilise the sector's liquidity stress will play a crucial role in shaping the future of the property sector. As China explores sustainable alternatives in a slumping property market, the sector’s evolution will remain a topic of interest and importance in the coming year.

Bearing the weight of slowing economic momentum, China remains a wildcard for the Asia-Pacific region. A substantial recovery hinges on an economic revival and resolution of the credit crisis, but China’s real estate market cannot be painted with a broad brush.

2024 is the Year of the Dragon, traditionally associated with good fortune and auspicious opportunities. Despite the strong headwinds, China can achieve a soft landing in its real estate market.

Policy changes will have to be rolled out sooner, including the fair treatment of private property developers by banks, and proactive measures to acquire and to repurpose excess inventory in lower-tier cities. These measures will prevent supply imbalances, accelerate urban-rural redevelopment initiatives and increase the supply of affordable housing in first- and second-tier cities.

With the Chinese government's recent shift towards a more accommodating stance and introducing policies to kickstart growth, any pick-up in economic momentum will likely lead to a swift change in its trajectory.

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