For China, reining in real estate a high-stakes balancing act | Property

China’s attempt to contain its debt-ridden real estate market has become a high-stakes balancing act: cracking down on excessive real estate construction without pushing so hard that it misappropriates developers.

As Beijing reduces the Chinese economy’s reliance on the country’s vast real estate sector, authorities are easing restrictions on lending and house permits to avoid a market slump amid a liquidity crisis that has put developers like China Evergrande Group close to bankruptcy.

According to data collected by China Beige Book International, bank lending to real estate firms was higher than ever in the second or third quarter of 150 billion yuan ($ 23.5 billion) in the previous month.

In Chengdu, capital of southwest Sichuan Province, officials are accelerating permits for home sales and real estate loans, while easing restrictions on the use of pre-sale proceeds. As financially weak property developers have become reluctant to bid for land – an important source of income for municipalities – some cities have begun to relax the rules for selling land.

“Beijing wants to make sure there is enough liquidity to sustain construction in the real estate sector,” Janz Chiang, an analyst at Trivium China in Beijing, told Al Jazeera. “But it doesn’t want a sudden flow of easy credit either – the very practice it has been trying to suppress for years. So your challenge is to find out where the magic point lies between having enough liquidity and preventing the real estate sector from re-inflating. “

Shehzad Qazi, executive director of China Beige Book International, told Al Jazeera there are signs of increased borrowing across the economy.

“Real estate firms are also leading the pace in bond issuance,” said Qazi. “Not only are they seeing a rebound in bank lending, but they are also clearly given the room to sell bonds to fill the holes in their businesses.”

Qazi said the tracking of non-bank lenders is an important indicator of the future direction of the market.

“In the third quarter, we saw historic levels of non-bank lending in the sector, with 46 percent of all loans taken out by real estate firms came from shadow lenders such as trusts and small lending firms,” ​​he said. “The state-controlled banks did not lend to private companies at all, so they had to use non-bank lenders.”

Troubled developer Evergrande’s liquidity crisis has raised concerns over the health of China’s real estate sector
[FILE: John Sibley/Reuters]

Nonetheless, Beijing has signaled that it will not deviate from its “Homes are to live, not to speculate” campaign.

In an essay earlier this month, Vice Prime Minister Liu He said officials should “focus on stabilizing land prices and house prices and stabilizing expectations” in order to “solve household housing problems and promote the healthy development of real estate companies.”

“Senior officials have made it crystal clear that they are satisfied with their policies and have consistently reaffirmed their intentions to cool the market,” said Chiang.

“While they are most likely to continue on their policy stance to cool the real estate market, we expect some easing of credit control from banks after regulators indicated that their excessive policy responses were responsible for the slowdown.”

China’s real estate sector accounts for more than a quarter of the country’s economy, which officials see as a threat to economic stability. Eight of the top ten most indebted real estate developers are based in China, and Beijing was aware of the problem of over-indebtedness even before Evergrande’s debt rush shook investors.

In August 2020, Beijing began restricting borrowing with the “three red lines” policy, which requires developers wishing to refinance to have a 70 percent limit on asset liabilities, excluding advances from contractually sold projects, one 100 percent net debt to equity cap and a cash to short-term debt ratio of at least one.

The restrictions have contributed to the fact that new construction, home sales and house prices have fallen this year. Real estate investment growth, which peaked at 38.3 percent in January, fell to 21.6 percent in April, 10.9 percent in July and 7.2 percent in October.

“There is a realization that the previous growth model – with high debt, high investment and high growth – no longer works,” said Qazi. “Beijing recognizes that it needs to move to a more sustainable model, which means slower growth.”

But Qazi said Beijing seems to be taking a flexible approach to restructuring the sector.

“Beijing works with local governments in around 200 cities where Evergrande has unfinished projects,” he said. “They are creating task forces to assess the status of these vacant lots and hand them over to new developers so that Chinese households can get what they paid for. Here the government has a flexible policy on debt by allowing the outstanding debt on these properties to remain off these developers’ balance sheets. “

“Balanced and sustainable growth”

Sam Xie, director of research at CBRE China, told Al Jazeera that while there is evidence that banks have accelerated loan approvals for adequate funding needs, he does not expect any major lending easing in the near future.

“The political stance remains that ‘housing is for living, not for speculation’ and the ‘three red lines’ remain in place to curb excessive speculation and over-indebtedness in the sector,” Xie said.

China-listed developers will have nearly $ 100 billion in corporate bonds expiring over the next two years, according to CBRE.

“Therefore, it is expected that high leverage developers will continue to focus on non-core asset relocation and postpone any aggressive expansion plans while the authorities focus on balanced and sustainable growth,” said Xie.

Chiang, the Trivium China analyst, said Beijing’s policies are guided by a long-term view of the market.

“Regulators likely believe that once the temporary correction ends, the sector will be healthier than it was before, and that is what they have been working towards for years,” she said. “Policymakers are not going to starve this crucial sector, so some policy reorientation is possible and becoming more likely. We have seen some degree of easing, such as encouraging developers to issue bonds in the interbank market. Nevertheless, a total turnaround in the strict real estate policy is not in sight. “