According to Oxford Economics, Chinese real estate developers’ cash flows, a measure of their ability to stay afloat, decreased this year following a decade of consistent rise.
According to research done by Tommy Wu, the firm’s principal economist, developer cash flows through July were down 24% year over year on an annualized basis.
According to the data, there has been a noticeable slowdown from growth for almost every year since at least 2009. On an annualized basis, total funding as of July was 15.22 trillion yuan ($2.27 trillion), compared to 20.11 trillion yuan in 2021.
The decline occurs as property developers continue to suffer and credit demand in China fell short of expectations in July.
Beijing began to take action against developers’ heavy reliance on debt for growth about two years ago. Noteworthy was Evergrande’s late-year default. Even though their balance sheets appeared to be in better shape, other developers like Shimao have also defaulted.
While foreign investors have become wary of Chinese real estate firms, developers now run the risk of losing a crucial source of cash flow: homebuyer down payments.
Cash flows for real estate developers are decreasing
In China, houses are frequently sold before they are finished. However, several homebuyers have stopped making mortgage payments in protest of the delays in apartment construction since late June.
“The crux of the problem is that property developers have insufficient cash flows – whether because of debt-servicing costs, low housing sales, or misuse of funds – to continue with projects,” Wu said.
“Resolving this problem will rebuild homebuyers’ confidence in developers, which will help support housing sales and, in turn, improve developers’ financial health.”
According to Morgan Stanley’s estimate as of August 10, more than $2 billion in high-yield property developer debt is due in September, which is more than twice that of August.
According to a survey published on August 15 by the U.S. investment bank, which used its own AlphaWise Consumer Survey, around a quarter of homebuyers who purchased real estate before it was finished are likely to quit making their mortgage payments if work is halted.
In addition to making up the majority of household wealth in China, economists estimate that real estate and related businesses contribute to more than a quarter of China’s GDP. This year’s economic growth has slowed down generally due to the real estate downturn.
The People’s Bank of China has lowered interest rates in an effort to stimulate economic growth, including an unanticipated reduction of 10 basis points to some institutions’ one-year interest rates on Monday under the so-called medium-term lending facility.
According to Bruce Pang, chief economist and head of research for Greater China at JLL, the issue is more complex than just money, despite the PBOC’s hopes that the cut will reduce some of the burden on homeowners and make it easier for developers to obtain loans.
He pointed out that developers are now more dependent on pre-sales to homebuyers because it is tougher for them to secure funds on their own. But because of their expectations for future employment and returns on current investment items, he continued, individuals are becoming more hesitant about purchasing new properties.
The central government has not formally announced broader support for real estate despite several rumours of plans to keep developers supported. The delivery of finished homes is the responsibility of local governments, according to a readout from a high-level government meeting last month.
According to Wu’s data, of the three main sources of developer funding, advance payments and deposits have decreased the most this year, by 34%.
The annualized statistics revealed that self-raised capital, which includes stocks and bonds, decreased by 17% while credit as a source of funding decreased by 22%.
Investors avoid China real estate
The number of investment funds that would have provided finance to Chinese real estate developers has decreased as a result.
“What has been worrying has been the lack of willingness and speed by top policymakers in resolving real estate developer’s funding issues,” According to Carol Lye, Brandywine Global’s assistant portfolio manager, in an email to CNBC.
The investment management company’s allocation to China real estate, according to Lye, is modest, & Brandywine maintains “high quality real estate bonds that have been given preference in terms of government support.”
Even now, some investors are looking to businesses in other Asian regions.
“We’ve exited almost all of our holdings in China residential. It’s more a wait-and-see game in terms of getting back exposure,” stated Xin Yan Low, the portfolio manager for Asia property equities at Janus Henderson, who is located in Singapore. She opted not to provide a timeline for those sales.
“There are still many alternatives in the region, especially with reopening now, Singapore, Australia, basically back to full reopening, fundamentals are strong,” she said.
She co-manages the Horizon Asia-Pacific Property Income Fund, which has Hang Lung Properties, Mapletree Logistics Trust, and Japan Metropolitan Fund Invest among its top holdings.
In a research published this month by Morningstar, Patrick Ge noted that some funds have shifted away from China real estate in favor of other high-yield Asian industries, such as Indonesian real estate and Indian renewable energy firms.
According to the research, overall investment in China property funds fell by 59% over a six-month period.
But the report said that BlackRock, a major investor, was one of the companies purchasing Chinese real estate bonds, including those of Shimao.
