Summary:
- Expectations for the real estate sector in China point towards a stable outlook and gradual sales recovery over the next 12 months.
- Central government funding support and a stabilizing operating environment are likely to benefit better quality developers, including larger SOEs and POEs.
- Financially weaker developers may face challenges amid the improving environment and policy measures, leading to potential consolidations and debt-solving processes.
- Land sales decline has impacted local government revenue, posing risks to local government financing vehicles (LGFVs) and intensifying contingent liabilities for both local and central governments.
Expectations for policy support for China's developers are likely to remain selective, according to analyst Lillian Li. While the overall sector is expected to maintain a stable outlook with gradual sales recovery over the next 12 months, the risk of default among China's private developers is anticipated to decrease. The central government's funding support and stabilizing operating environment will favor better quality developers, including larger state-owned enterprises (SOEs) and privately owned enterprises (POEs). However, financially weaker developers may benefit less from these measures, leading to potential consolidations and debt-solving processes in the short term.
Li also pointed out the challenges concerning the property developer landscape and its impact on local governments and local government financing vehicles (LGFVs). Land sales, which have declined recently, are affecting the revenue sources for local governments, limiting their ability to support LGFVs responsible for local infrastructure and investment. Consequently, a rising risk of refinancing and differentiation between LGFVs owned by stronger and weaker local governments poses intensified contingent liabilities for both local and central governments.
As the year progresses, market observers will closely monitor the implementation of selective and localized policy measures to support the real estate sector. The focus on privatization as a policy objective is expected to continue shaping the landscape of property developers in the coming years, with tier one and tier two cities potentially benefitting the most.