Experts are saying that the age of highly speculative real estate investing in China is probably over.
A global real estate study by UBS Asset Management noted that strong economic growth, coupled with regulatory measures and tightened conditions for property-related loans, are having a noticeable impact on the Chinese real estate market.
China clocked a 6.9% growth rate in 2017, beating the government's target of 6.5%.
‘Having surprised on the upside, the minimum GDP [gross domestic product] growth now required to meet the government’s long-term goal of doubling GDP between 2010 and 2020 is 6.3% p.a. [per annum],’ the UBS report noted.
‘This means that China can now afford to focus on its reform goals and deleveraging, and we do not expect real estate investment and construction to feature highly in the growth inputs.’
Property and related sectors, a key pillar of the economy, currently contribute about 30% to China’s GDP, according to Julius Baer estimates.
Moreover, UBS stated that anecdotal evidence and ground checks have shown that financing channels are becoming limited, with commercial banks coming under pressure from regulators to increase scrutiny on property loans.
The Swiss asset manager also believes that as part of the 40th anniversary of China’s ‘Reform and Open Up’ policy, Beijing will likely make further headways in the legislation of a nationwide property tax in 2018.
Property has long been the darling of investors in China but president Xi Jinping's efforts to tame the market seem to be taking effect.
Transactional volumes for income-producing commercial assets in China were approximately 5% lower in the first quarter of 2018, compared to the same period in 2017.
Moreover, after two years of strong growth, official data is reflecting a slowdown in sales momentum over the past few months.
The easing of speculative activities has been evident in the high yielding space for some time as a positive result of reform efforts and financial discipline, Fan Cheuk Wan, head of Asia investment strategy at HSBC Private Banking told Citywire Asia.
Default risk concerns are also on the rise in the Chinese property market in 2018 with a number of builders facing bond maturities this year amid a deleveraging drive by the government.
‘This will squeeze out those issuers who have more fragile financial fundamentals and the Chinese government is now enforcing financial discipline to avoid moral hazard and government bail-outs of unprofitable companies,’ said Fan.
However, investors expect China's property markets to remain strong, with property investment rebounding in the first quarter of 2018 supported by an increase in land prices.
Further liberalisation of the financial sector and the government's push for technologival innovation is also expected to boost property demand in tier one cities.
UBS also noted interest from foreign investors, who are looking at private debt or mezzanine financing opportunities in cash-strapped domestic property players.
Meanwhile, HSBC is more positive on Chinese property bonds than equities at this stage despite a sell-off since February.
‘Even within the Chinese credit market there is a huge divergence in terms of credit fundamentals,’ Fan said. ‘Currently, bond investors need to assess the creditworthiness before they put money into credit issuers and this will improve the credit market fundamentals in the medium-term and also make the asset class more attractive.’
In a note, Magdalene Teo, head of fixed income research, Asia at Julius Baer noted diverging trends in city-specific policies, which could further contribute to divergence in the performance of developers.
‘In recent months, several cities have announced additional tightening measures, while others have seen a mild easing of pre-sales restrictions,’ said Teo.
Hainanese authorities, for example, have introduced measures such as restrictions on residential purchases by non-locals, lengthy residency requirements and high down payments to avoid speculation.
‘We would advise investors to stay defensive and stick to short-dated exposure of quality developers and consolidators,’ she concluded.