Hopes that property investment will lift overall Chinese economy seen as fanciful, say analysts

China has identified property destocking one of its top priorities and signalled a continuation of its accommodative policy stance this year in the hopes that renewed property investment will help buoy slowing economic growth, although economists are less optimistic about the outcome, saying efforts to reduce the home glut could take longer.

With exports plunging more than 25 per cent in February, the real estate sector has emerged as the new economic driver meant to keep gross domestic product growth for the world’s second-largest economy from falling below 6.5 per cent this year.

However, the government appears to be placing too much hope on the outcome.

“Destocking is not likely to help investment,” said Zhao Yang, China chief economist at Nomura International. “There are too many flats in third and fourth-tier cities. It will take at least three to five years to clear them. During this period, new investment [activity] would be very weak,” he said.

Zhao added that third and fourth-tier cities accounted for about 70 per cent of total property investments in the country.

Last year, China’s annual property investment growth slowed to 1 per cent, the worst since 1998, as developers took notice of the risk of oversupply and held back from bidding on new land or starting fresh projects.

Despite the government’s continuous stimulus measures to revive the market, inventory levels in lower-tier cities have hardly budged. The average inventory level among 11 third-tier cities tracked by Morgan Stanley remained at 19 months in January, unchanged from six months ago.

The country’s four biggest cities, including Beijing and Shanghai, which are short of home supply and are still attracting increasing investment, make up only 5 per cent of its total investment.

Zhao expects China’s property investment level to be negative in the next three to five years.

Many major developers have also said they will remain conservative in land purchases this year.

“We may reduce our land investments this year to position ourselves well for the next ideal land banking period,” Shanghai developer CIFI Holdings (Group) said in its annual report released on Wednesday.

This was despite a jump of nearly 50 per cent in its sales to 30.2 billion yuan (HK$36 billion) last year.

Ratings agency Standard & Poor’s expects investment levels to see moderate growth this year. “Developers who accelerated destocking will step up their land acquisitions,” said Cary Huang, S&P’s director of corporate ratings.

Zhao said the slowdown in property investment would put pressure on sectors like cement, steel and machinery, but that might be the only way Beijing could push through structural reform in these sectors.Real estate and related sectors currently contribute as much as 30 per cent of China’s GDP.

Zhao added that the biggest risk in the country’s property market was a price slump. But he said the housing bubble growing in first-tier cities was not likely to burst as prices were largely supported by strong demand rather than just market sentiment.

JP Morgan analysts echoed the same sentiment and said the degree of leverage was not high as down payments for first homes were still in the 25 to 30 per cent range in first-tier cities.

Zhao said: “But I’ve noticed that home prices in some second-tier cites picked up quickly. If this momentum moves to third and fourth-tier cities, the risk will be much higher.”