China’s real estate renovation is too cosmetic

People walk past the Central Business District (CBD) in Beijing, China January 16, 2022. Picture taken January 16, 2022. REUTERS/Tingshu Wang

HONG KONG, May 26 (Reuters Breakingviews) – China’s ailing property sector is proving to be a tough repair job. The sluggish economy and pandemic-related lockdowns have only increased the degree of difficulty. Policymakers are digging deeper into the toolbox, but a lack of faith in the industry’s foundations make it harder to rebuild.

The People’s Bank of China recently joined wider efforts to help, by lowering the benchmark five-year loan rate by 15 basis points to 4.45%. Local governments also have dropped restrictions, such as Harbin’s ban on homeowners from selling within three years of purchase, per credit analyst CreditSights. Other regions reduced down-payment rates while banks in some big cities have quickened mortgage approval times.

These moves are having only a limited effect, however, as prospective homebuyers worry their builder might collapse. New home sales fell 32% in the first four months of the year, after having risen 5% in 2021. At least 18 developers, including Guangzhou R&F Properties (2777.HK) and Redco Properties (1622.HK), have this year swapped offshore debt coming due for new notes, according to Goldman Sachs research. Most of those bonds still trade at or below 30% of face value, implying that investors aren’t convinced the extensions improve their chances of being paid back. Small wonder: four of them have defaulted since exchanging.

Without stabilising the developers, it’s hard to see how boosting demand will make much difference. Chinese authorities have encouraged stronger companies to take over weaker rivals, but it’s a hard sell with banks in retreat. Domestic loans to developers slumped 24% in the four months to April 30 compared to the same span a year earlier. Opaque bankruptcy and workout processes aren’t helping either. Two smaller operators that collapsed a couple of years ago owing $1.5 billion in offshore debt between them have yet to make material progress resolving their affairs. That’s hardly encouraging for any bargain hunters.

Chiseling away at the effects of a runaway housing market cries out for stiffer resolve. Beijing is capable, evidenced by the strict leverage curbs it imposed on developers in the first place. Circumstances have changed, though, and cheaper mortgages will achieve only so much. If China is serious about wanting to buttress property developers, it’ll take a bolder economic blueprint.

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CONTEXT NEWS

– China’s central bank on May 20 lowered the benchmark five-year lending rate to 4.45% from 4.6%, a bigger cut than the 5 basis points to 10 basis points that was expected.

– Residential property sales fell 32% in the first four months of 2022 from a year earlier, according to figures released on May 19 by China’s National Bureau of Statistics.

Editing by Jeffrey Goldfarb and Katrina Hamlin

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