Emerging markets: China’s property industry is responding to stimulus

Pendal’s Global Emerging Markets Opportunities team remains positive about China’s property sector. Here they explain why

• Signs of optimism in China’s property sector
• Caution should be applied when choosing where to invest
• Find out more about Pendal Global Emerging Markets Opportunities Fund

CHINA remains the most interesting emerging market from a top-down standpoint.

Here we focus on its property sector.

The scale of China’s property problem in recent years should need little introduction.

But to summarise it in a statistic: residential property sales were RMB 6 trillion in the first nine months of 2024, down from RMB 12.2 trillion in the first nine months of 2021.

A crackdown on new lending to most private-sector real-estate developers since 2020 has coincided with a broad slowdown in the rest of the economy.

This created a crisis of confidence in real estate, which quickly became a liquidity crisis for developers and a funding crisis for local governments.

Stimulus measures

In September, Chinese policy makers announced fiscal and monetary stimulus which brought about the prospect of change.

This included broad policies aimed at supporting the property sector.

They also specifically allowed the refinancing of a potential USD 5.3 trillion in residential mortgages from November, and a reduction in the banking system’s required reserve ratio.

Signalling from central government fed through to local governments.

Important commercial hub Guangzhou became the first tier-one city to remove all restrictions on buying residential property.

Other top-tier cities Beijing, Shanghai and Shenzhen eased rules on home-purchasing in suburban areas.

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal Global Emerging Market Opportunities Fund

Property sales rising

Chinese property sales data is normally released in the middle of the month, but there are some data sources that provide an early look.

Most significantly, listed property companies report monthly sales data early the following month.

Data released in early November covers the first full month since stimulus was announced.

For the 22 biggest listed real estate developers, October sales were up 68% month-on-month and 3% year-on-year.

A 3% rise is hardly a return to boom conditions. But as the first ten months for 2024 were down 34% on the equivalent period in 2023, it looks like a significant turning point has been reached.

More positive data

Other anecdotal evidence also supports this view.

New home visits over the October 1 National Day holiday were up 93% year-on-year in Beijing and 200% in Guangzhou.

Prime land in Shenzhen and Chengdu has been sold in recent weeks at high prices, reflecting optimism and financing availability for developers.

October national real estate data (due in mid-November) should give much more clarity on this suggestion of a turning point.

Caution advised

Despite this positive data – and despite strong share price performance among some real-estate developers – some caution must be exercised.

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Inventory of unsold homes held by real estate developers is an estimated 28 months of current sales volumes.

Inventory in suburban areas and in tier-two and tier-three cities may be very difficult to sell.

And the Chinese economic slowdown is not driven solely by real estate: policy makers may fail to follow through on their announcements.

Keep an eye on country-level data

Operating a top-down investment process involves continually updating views as economic and company data is released.

A major policy announcement has been followed by a series of data points indicating a turning point in this critically important sector.

We will continue to assess the strength of the recovery and be alert to new investment opportunities.

Until then we remain overweight China in the Pendal Global Emerging Markets Opportunities Fund, with a selective –  and we believe higher quality – set of holdings.

We remain overweight Chinese real estate, with a holding in the more defensive state-owned segment of the industry.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund’s top-down allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
 
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