Analysis – China’s home inventory drive brings little cheer to developers By Reuters

Written by Clare Jim and Ziyi Tang

HONG KONG/BEIJING (Reuters) – China’s efforts to clear its massive inventory by converting unsold homes into affordable housing is unlikely to help cash-strapped developers due to the program’s limited scale and potentially low prices, analysts said. The developer says:

As part of a support package for the crisis-hit real estate sector, Beijing last month announced plans for a 300 billion yuan ($41 billion) loan facility, which would provide $500 billion worth of bank capital to local state-owned enterprises (SOEs). You can procure it. ) We purchase completed and unsold homes.

Through this central bank-backed facility, Chinese banks are expected to provide cheap loans to state-owned enterprises to help them buy homes from developers at “reasonable prices” and convert them into affordable housing.

However, some private developers see their projects rarely being selected as credit facilities are inadequate and the scheme is expected to be launched only in large cities where affordable housing is available. The prices offered by SOEs are also likely to be low, they say.

Developers’ cautious stance could pose a challenge to Beijing. That’s because support measures over the past two years have failed to revive the sector, which at its peak accounted for a quarter of GDP and remains a major drag on the economy.

Guangzhou’s Xintang Town is the first local government to issue a notice to purchase “suitable housing stock” for resettlement housing since the May 30 support package.

Citing the notice, China Real Estate Business, a media outlet controlled by the housing authority, reported that the local government would purchase the homes at cost price.

The project, jointly owned by state-owned Jinmao and major developer Vanke, has applied, the news report added.

Some developers said purchasing at 20 to 30 percent off market price was better than expected.

A senior executive at a private developer that defaulted said his company would be interested in applying if other cities made similar proposals to Xintangzhen, but he expected the offers to be low and not enough to cover the construction loan.

“How do we repay the loan if we don’t have enough to cover the development loan? Even the lending banks won’t agree,” said a senior official at a developer in Shanghai. problem.

But analysts at Citi and Bank of America said a 50% price discount is needed to ensure adequate returns for SOEs because affordable homes typically sell at a 10 to 50 percent discount to private homes.

Even if developers could sell completed apartments to state-owned enterprises for a profit, local governments could require that the proceeds be used to complete existing projects rather than repay debt.

An executive at another developer said a credit default “won’t help us as a public company or repay our foreign debt.”

Gavekal Dragonomics estimates that 500 billion yuan would pay for 12% of the housing stock when purchased at average market prices and 20% when purchased at a discounted price.

S&P said converting existing stock into social housing would increase low-cost transactions and reduce overall prices.

China’s Ministry of Housing, the central bank, the country’s top banking regulator and the Guangzhou provincial housing authority did not respond to requests for comment. Jinmao did not respond to a request for comment and Vanke declined to comment.

execution risk

“Only a small number of distressed developers will benefit,” said Esther Liu, a credit analyst at S&P Global Ratings. She said, “(Completion) is a problem that distressed developers are having. There’s not a lot of completed inventory.”

Developers are waiting for clarity on demand and pricing from state-owned enterprises, but some bankers say affordable housing plans could worsen asset quality as state-owned enterprises would struggle to generate enough revenue to repay bank loans. .

Banks can borrow at 1.75% interest from the $300 billion refinancing facility to finance 60% of the loans they provide to SOEs.

Analysts estimate that overall, SOEs would have to pay interest of about 2.5% on these loans, similar to the average rental yield in China.

“It’s good for the real estate sector, but it’s not good for state-owned enterprises and banks,” said the first executive, who declined to be named because he was not authorized to speak to the media.

To be sure, banks and local governments are risk averse.

Last February, the central bank launched a 100 billion yuan refinancing program to help local governments in eight cities purchase housing stock, of which only 2 billion yuan had been utilized as of the end of March 2024.

“We believe the execution risk is high, given that banks and local SOEs must fully bear credit and investment risks,” said Zerlina Zeng, senior credit analyst at CreditSights.

But support from central government has led to more visitors coming to top-tier cities following the latest stimulus package, which included lower down payments and the removal of mortgage interest rate floors, analysts and developers say.

“The central government has stepped up (to provide support). The turning point is the important change here,” said Karl Choi, head of Greater China real estate research at Bank of America.

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