COVID-19’s Impact on China’s Real Estate
To look at the impact of COVID-19 on the Chinese real estate market and the outlook for the months ahead, it’s useful to consider historic patterns. Because of the Chinese Spring Festival in late January, sales are usually slow at the start of the year. In fact, sales volume for January and February together typically is equivalent to average monthly volume during the rest of the year. Since the number of new confirmed COVID-19 cases is declining and therefore the current crisis may soon dissipate across the country, a recovery during the historically busiest months of March, April, May, September, October, and November may result in total annual property sales figures that are down by only about 6% or 7%. The only concern is whether March, April, and May will rebound vigorously.
The central government’s policy stance toward the real estate market keeps it under tight regulation and restricts its access to credit due to worries of an overheating sector. The state actively promotes economic growth in other sectors, so it’s expected that as soon as the macroeconomy fully recovers, the real estate industry will quickly follow, without a targeted stimulus.
There’s little to be optimistic about in real estate during the first half of the year, but sales should be brisk in the second half. China’s property market is highly concentrated, with the top 200 developers holding the major market share and sitting on huge inventories. These developers are currently under a lot of pressure, having seen little in the way of sales for two months. They must produce more sales from now through June to jump-start the market, and pricing will be a major factor in that. For the year, therefore, developers will likely focus on transaction volumes, generally resulting in low-level prices.
Some developers and cities will be affected by these trends more than others. Some Tier 2 cities, such as Hangzhou and Nanjing, saw price increases in 2016 and 2017, as well as in the fall of 2019. Post-crisis, that appreciation momentum will dissipate. In some Tier 3 and Tier 4 cities, located north of Yangtze River or close to the Yellow River, or cities like Tangshan, property prices didn’t rise much for five years. But prices rose rapidly last year, and while they remain high, they will probably reverse.
In Tier 1 cities, prices were moving upward strongly in Shenzhen and Hangzhou at the end of last year. They were slightly higher in Shanghai and stable in Beijing. If inventory is liquidated in the first half of this year, there will be upward momentum in the second half.
In Tier 3 and Tier 4 cities south of the Yangtze River, and in Tier 2 cities north of the river, prices continue to fall from high levels. At the end of 2020 or the beginning of 2021, when inventory is almost liquidated, prices should begin to rise. Over the past two years, inventories in those markets have declined significantly.
China’s central government is under no pressure to stimulate the country’s residential property market because it needs to control the number of new projects due to declining growth in the urban population, from a peak annual gain of 20 million in 2015 to about 15 million currently. Assuming a household of three people, the increase in urban population each year can be translated into demand for 5 million units, down from 8 million. Where can new demand be found to pick up the slack? In 2014, the government launched a program to tackle shanty towns as well as renovate old neighborhoods. Such a program consumes a peak of 6 million units per year and can last another three to five years. Other areas of possible growth, such as building larger homes for those who want to upgrade their housing, or building entire industrial towns, also present limited opportunities.
In recent years, a new property category was invented: culture and tourism towns. But these require thousands of mou (0.165 acre, or 666.5 square meters) of land. Some small developers who bought land to create these towns have encountered great difficulty and currently face unsustainable cash flow demands.
Throughout the country, the residential market is in oversupply, especially in small towns in west China. Demand remains sufficient in those Tier 1, Tier 2, and Tier 3 cities where the population is growing strongly. Undersupply is apparent only in Tier 4 and Tier 5 cities that saw no price rises over the past several years; in Tier 4 and 5 cities in west and northeast China, population declines will have a negative impact. Over the next two to three years, most demand will come from Tier 3 and lower-tier cities, or coastal cities.
The commercial property market is already in oversupply, but new projects are still launching, totaling 400 to 500 million square meters. Good management, therefore, is crucial. Large, well-capitalized, and well-run commercial developers remain viable, especially if their properties are in downtowns or areas with fast population growth. Previous years’ sales proceeds may help support commercial developers with less viable properties, but that can only last so long.
JianXiong Xue is the Founder and CEO of UTC Asset Management Co., Ltd., an asset management company offers property rental, acquisition and sale in China. Previously, Mr. Xue was Research Director at China Real Estate Information Corporation and Senior Analyst at E-House (China) Research Institute since December 2008. In this role, he consulted on property market fundamentals, land supply and government regulations for large developers, leading investment funds, commercial banks, building material manufacturers and government bodies.
This article is translated and adapted from the GLG teleconference “Coronavirus’ Impact on China Real Estate.” If you would like access to this teleconference or would like to speak with JianXiong Xue or any of our more than 700,000 experts, contact us.
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