Out of the box measures needed to solve sectoral issue
- For the recent mortgage boycotts, we think banks’ intervention to ensure project delivery should contain the escalation of the issue.
- We estimate that there are about 1.1m apartments from private developers in China facing some level of construction delay due to liquidity issues.
- We think central government needs out of the box measures such as setting up a property relief fund to help developers and stabilise the property market.
- We recommend staying with SOEs and large quality developers, such as CR Land, Longfor and COLI. Among beta names, we like CIFI.
We estimate 7% of undelivered projects face construction delays
A multi-phase residential project in China typically has a 3-year development cycle with about 30%/40%/30% delivery in year 1/2/3 when a project starts presale. We estimate that there are about 16m apartments (value: Rmb16.8tr or GFA: 1.7 tr sqm) in China which were presold from 2020 to 1H22 but not yet delivered. Assuming that 40% of private developers (accounting for 60% of market share) have liquidity problems and 30% of their projects face construction delays or stoppages, we estimate that construction work for c.1.1m apartments (value: Rmb1.2tr) is affected in China.
Cancelling presales mechanism may be detrimental to the sector
There are stakeholders asking the government to abolish the presale mechanism to protect homebuyers’ interest. We think that the government should weigh this suggestion carefully, as it could have a negative impact on the sector including SOE developers, as presales cash flow is critical to developers’ daily operations. In our view, the government should at least offer a 3-5 year transitional period for developers to adjust their business models.
Banks are asked to provide funding to complete the projects
In response (Click here) to the latest homebuyers refusing to pay mortgage payments, on 17 Jul 2022, the China Banking & Insurance Regulatory Commission (CBIRC) has asked banks to undertake social responsibility to ensure the delivery of projects on time. We believe that some of those affected projects should resume construction work in the near term after banks release funds from their escrow accounts or provide additional funds for project construction. Overall, we think the move should help stem the mortgage boycotts.
How can the China property sector be saved?
In our view, many private Chinese developers face a combination of refinancing difficulties and sharp fall in presales. The latter is due to a lack of homebuyer confidence, hence the default on their debts. To solve developers’ liquidity issues comprehensively, we think that the central government needs out of the box measures such as setting up a dedicated property relief fund to help developers. This would help 1) prevent more developers from defaulting, 2) reopen capital market to developers, and 3) restore homebuyers’ confidence, which should help developers’ sales. We think that a property relief fund would help solve developers’ short-term issues and buy time for regulators to solve the sectoral issue.
Developers’ presales projects 1-2 years before completion
The presale mechanism in China allows developers to sell their projects 1-2 years ahead of completion. Developers will receive most of the presales cash a few months after completion of sales and purchase contract by 1) homebuyers’ downpayment, which accounts for 20-40% of apartment value, and 2) remaining 60-80% from mortgage loans.
Reiterate Overweight; top picks: CR Land, COLI, Longfor, CIFI
We recommend staying with state-owned enterprises (SOE) such as CR Land, COLI or large quality developers such as Longfor. Among high beta names, we like CIFI. Re-rating catalysts are faster-than-expected solving of mortgage boycott issue. Downside risks include homebuyers refusing to pay their mortgages and weaker-than-expected sales in 2H22.