New housing starts in China have been falling for the past 20 months, contributing to the slowdown in China’s economic growth and impacting global commodity prices. Recent bad news and fears of further declines have prompted anxiety and even panic among investors.  But might outside observers be overreacting to the headline numbers coming out of China’s real estate market?

Looking at recent sales data, we are much less downbeat. Throughout China’s major cities, accommodative policy measures such as lower mortgage rates and reduced down payment requirements have tapped into pent-up demand from upgraders and boosted residential sales over the past six months. Over the first eight months of 2015, national residential sales revenue has jumped 18.7% compared to the same period in 2014, and the amount of residential floor space sold is up 8.0%.  Against this backdrop, many developers saw their sales revenue improve over the first half of 2015 after contracting for much of the previous year.

China residential sales revenue and residential area sold

Source: CEIC

Profits, on the other hand, generally grew at a much slower pace over the same period. Reasons for this include falling average prices (mostly in lower-tier cities), increasing land costs, and rising financing costs. Overall we feel that China’s real estate market has entered a new phase defined by slower growth and slimmer margins, in which developers are more cautious and selective when deciding in which cities to invest and which land plots to buy. These trends are manifest in the recently intensifying competition for land plots in Tier 1 cities, whose market fundamentals tend to be much healthier than those in lower-tier cities, where land sales remain sluggish.

Recently improving residential sales have not translated into a revival of residential property investment, which expanded by only 2.3% y-o-y in the first eight months of 2015, the slowest pace since early 2009. In addition, new residential starts fell for the 20th consecutive month in August 2015, as developers focused on de-stocking rather than new projects in most Tier 2 and 3 cities. It will take considerable time to digest inventories that built up over the past three to five years – again, mostly in lower tier cities. For this reason, we are not expecting new starts to pick up in the near term. This actually is not bad news for the real estate industry as a whole – we might even argue that a period of reduced construction now is necessary to reduce the surplus housing in lower tier city markets. As inventory pressures decline and developers rationalise their investment approaches to suit China’s new market conditions, the stage will be for healthier development in the mid-to-long-term.

China residential area started and residential investment
Source: CEIC 

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