Across The Border

China developers ramp up home construction in sign of improving demand/supply balance

Improving sentiment and a drawdown in inventory in China’s smaller cities has prompted some developers to green-light new projects

PUBLISHED : Wednesday, 15 March, 2017, 6:46pm
UPDATED : Wednesday, 15 March, 2017, 10:03pm

Economic indicators for February show China’s economy is warming up, supported by robust infrastructure investment, strong industrial growth, and recovering property sales.

Among drivers that offer major support to the macro economy, some analysts point to restocking by property developers in the coming months.

This is occurring against a backdrop of surging home prices which have lifted housing indexes to new highs.

Some school district homes, or homes located in areas with access to better quality primary or middle schools in Beijing, are selling at 200,000 yuan per square meter, equivalent to 28 times Beijing’s average monthly salary, mainland financial media National Business Daily reported last week.

Such high prices mean that home ownership has become unaffordable for many, even highly educated elites with degrees from China’s prominent universities including Tsinghua University.

We think restocking will kick-start even though we are in a policy tightening cycle.
analysts at UBS

“If a Tsinghua graduate cannot afford a home, why are parents paying so much to buy a school district flat for their kids’ education?” one blogger posted in an online forum.

China’s highly inflated property market has largely been a phenomenon limited to larger cities, although there are recent signs that housing markets in smaller cities are beginning to perk up.

In some of these cities, policies designed to help draw down unsold housing inventories, or destocking of homes held by developers, have acted as a source of support. In the months ahead it is likely that developers will kickstart new projects in an effort to re-stock housing inventories, adding support to the macro economy, analysts from UBS said.

“Tier 3 cities in most southern and eastern provinces have lower than average inventory levels of 12 months...The historical track record shows new starts are supported at an inventory level of around 12-18 months,” analysts at UBS said in a research note on Tuesday.

From January to February, new property starts grew by 10.4 per cent year on year, despite a high base. Meanwhile, developers completions grew 15.8 per cent year on year in the same period, the note said.

Although policy tightening to curb property inflation has started since late last year, “it was different from earlier tightening cycles,” the analysts said.

“With lower accumulated inventory (the lowest since 2013), roughly 44 per cent (measured by new starts) of cities/provinces have inventory of 12 months or below,” analysts at UBS said in a note last week.

“Our research suggests some lower-tier cities have improved into healthier demand/supply dynamics,” it said.

“We think restocking will kick-start even though we are in a policy tightening cycle. In the Work

Report at the National People’s Congress, Premier Li reiterated a focus on development of a stable property market but didn’t release further tightening signals,” the note said.

The Chinese government’s latest work report, delivered by Li last Sunday, outlined that the government will support end-user demand in third- and fourth-tier cities.

At the same time, the government will also increase land supply and fine-tune controls on development, marketing and agency activities in cities that have overheating prices.

Analysts with Moody’s said the tone set by the government report would strengthen the execution of its “differentiated policies”.

“We believe control measures in cities where property prices are increasing rapidly will remain tight or become even tighter in 2017, whereas policies in lower-tier cities where inventory is high will remain accommodative,” Moody’s said in a report issued on Monday.

They said the credit profiles of rated developers will remain healthy “given their stronger sales execution and more diversified funding channels...[which] put them in an advantageous position compared to their smaller unrated peers”.

Analysts with JP Morgan said housing market activity appeared to have held up better than expected, citing upbeat home sales volume, home prices, new home starts, and land sales.

“While the resilience may in part be due to a favourable base effect, which will disappear in the coming months (housing market acceleration started from March last year), it does point at uncertainty in the housing market outlook,” analysts at JP Morgan said in a report Wednesday.

Property investment growth was 8.9 per cent in January and February, slower than the abnormal 11 per cent in December but much higher than 2016 full year growth of 6.9 per cent. Floor space under construction growth was stable at about 3 per cent.