China's battered real estate market may be turning around.
The government's promise to support the sector and some easing of policies has boosted investor confidence, as bond trading volumes and prices rose in recent weeks.
China's high-growth property market may be a thing of the past, according to analysts.
S&P Global Ratings said in an early April report that China's policy cracking down on its residential housing market has been gradual, but it will take several quarters for markets to feel the effects.
When China's residential market emerges from this correction, it may be changed forever.
Some cities and banks are willing to support real estate again after a plunge in home sales in the last few months.
The director of the People's Bank of China's financial markets department said that banks in more than 100 cities in China have lowered mortgage rates by an average of 20 to 60 basis points since March.
He noted how Covid had affected some people's ability to pay their mortgage on time.
It’s hard to see the situation being resolved this year ... We will see developers not able to repay their debt.
The government's stance is to prevent the spillover from the real estate sector to the real economy. Gary Ng, an economist at Natixis, told CNBC in a phone.
Property and related sectors account for 25% of GDP in China and any change in the industry has significant implications for the economy. The latest wave of Covid restrictions has made growth more difficult.
The measures may have been too tight. The worst time is over for those developers who are in line with the current regulatory target or framework.
The problems of real estate developers in China came to a head after the authorities rolled out the so-called three red lines policy in August 2020. The policy places a limit on debt in relation to the firm's cash flows, assets and capital levels.
The policy resulted in banks becoming less willing to lend to the sector.
Evergrande, the world's most indebted developer, fell into default for the first time late last year. Some Chinese developers missed interest payments as the debt crisis unfolded.
The high yield bond market in Asia was dominated by Chinese real estate developers in the first quarter of this year. According to data from Dealogic, the region issued only $4.4 billion worth of debt, which is 85% lower than a year ago.
Chinese property developers were cut off from the bond market due to a growing number of stressed and distressed situations in the sector.
After China signaled support for its companies, sentiment turned around slightly in March.
According to data from MarketAxess, the volume of bonds traded in the real estate debt market increased by 20% in the month of March.
By the end of March, volumes had increased to $700 million, before falling back in April.
Bond prices went up as well. Between mid-March and the beginning of April, the Ice BoFA Asian dollar high-yield corporate index has climbed more than 15%.
Three provinces have loosened their policies, which include removing restrictions on home purchases for those without full local residency status, and that should lift short-term sentiment.
The policy relaxation measures are in line with our expectation and confirm the local governments increasing awareness and efforts to counter the rapid deterioration in the physical property market.
State-owned developers can buy land or other real estate assets at a cheaper price now. Seven out of 10 land acquisitions so far this year were by state-owned enterprises, a sign that the private sector is still struggling.
Kaisa entered a strategic cooperation with China Merchants Shekou Industrial Zone and China Great Wall Asset Management, both of which are state-owned. The agreement will include joint ventures and asset acquisitions, according to a Hong Kong exchange filing.
According to analysts, the situation for developers could get worse.
S&P pointed out that the policy relaxation has not applied to the supply of units.
It said in a briefing last week that supply may be limited even if homebuyer sentiment improves.
According to the ratings agency, 20 developers are facing a liquidity crunch and another 4% could be at risk under the joint venture model.
Several developers said they wouldn't be able to release their financial results on time.
Home prices aren't going to increase that much despite Beijing's focus on preventing speculation in the once-hot market.
He said that companies that once profited from surging home prices will need to adapt.
The analysts said that China's policy toward property investment has changed.
S&P Global said that policy will be guided by the principle that housing is for living.
Eric Xin, managing director at Citic Capital, said at an investing conference in Beijing in October that real estate will likely become a public utility so more people can afford housing in China.
The developers are in trouble because utilities should be dominated by SOEs. Capital should go into innovation.
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