China’s real estate industry accounts for more than a quarter of national GDP, according to Moody’s. Pictured is a housing complex under construction on December 15, 2021 in Guizhou Province.
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BEIJING – China’s real estate problems could spill over into other major sectors if problems persist – and three private firms are most at risk, according to rating agency Fitch.
Since last year, investors have been concerned that the financial problems of Chinese property developers could spread to the rest of the economy. In the past two months, The refusal of many homebuyers to pay their mortgages has brought developers’ problems back to the fore While China’s economic growth is slowing.
“If effective political intervention is not achieved in time, the malaise in the real estate market will extend and have implications for various sectors in China outside the real estate sector’s immediate value chain,” Fitch analysts said in a report on Monday.
Under this stress scenario, Fitch analyzed the impact over the next 12 to 24 months on more than 30 types of businesses and government agencies. The company found three more prone to real estate problems:
1. Asset management companies
These companies “hold a large amount of collateral-backed assets linked to real estate, making them highly vulnerable to the prolonged real estate market distress,” the report said.
2- Engineering and construction companies (non-state-owned)
“The sector in general has faced difficulties since 2021. … They have no competitive advantages in exposure to infrastructure projects or access to financing compared to their own. [government-related] their peers.”
3. Small steel producers
“Many of them have been operating at a loss for a few months and may face liquidity issues if the Chinese economy remains weak, especially given the significant influence in this sector,” the report stated.
Fitch said construction accounts for 55% of China’s steel demand.
The slowdown in the real estate sector has already lowered broader economic indicators such as investment in fixed assets and the furniture sales component of retail sales.
Fitch believes that the recent rise in the number of homebuyers holding mortgage payments on hold due to stalled projects underscores the potential for a worsening real estate crisis in China…
Fitch noted that official data shows home sales fell 32% in the first half of this year compared to last year. The report cited industry research as suggesting that the top 100 developers likely saw worse performance – with sales down 50%.
Impact on other sectors
While Fitch’s base case assumes that property sales in China will return to growth next year, analysts warned that “a deterioration in homebuyer confidence could halt the sales rebound momentum seen in May and June.”
Since late June, many homebuyers have suspended mortgage payments in protest against delays in building apartments they have already paid for, putting Future developer sales and an important source of cash flow at risk. Developers in China usually sell homes before they are finished.
The report stated that “Fitch believes that the recent rise in the number of homebuyers placing mortgage payments on stalled projects underscores the potential for a worsening real estate crisis in China, as waning confidence could stall the sector’s recovery, which will eventually spread through the economy.” the local”.
Overall, the analysis provided by Fitch found that large corporations and those affiliated with the central government were less likely to experience property deterioration than small businesses or those associated with local governments.
Fitch said smaller and regional banks – which reflect about 30% of the banking system’s assets – faced greater interbank risk. But the rating agency indicated that the risks to Chinese banks in general could rise if the authorities significantly eased lending requirements for troubled property developers.
The companies least exposed to real estate problems are insurance companies, food and beverage companies, electricity network operators and national oil companies, the report said.
Home prices in focus
Chinese real estate developers came under increasing pressure about two years ago when Beijing began cracking down on companies’ heavy reliance on debt for growth.
Figures such as vacancy rates give an idea of the scale of real estate problems.
China’s residential property vacancy rate has averaged 12% in 28 major cities, according to a report released last week by the Beike Research Institute, a unit of Chinese property sales and rental giant Ke Holdings.
This is second globally, after Japan, and higher than the US vacancy rate of 11.1%, the report said.
The report said that if there are strong expectations of lower house prices, these empty apartments may exacerbate the oversupply in the market – and the risk of lower prices even more.
Limited state support
This year, many local governments have begun easing home buying restrictions in an effort to support the real estate sector.
But even with the recent mortgage protests, Beijing has yet to announce widespread support.
“Even if the authorities intervene aggressively, there is a risk that new home buyers will not respond positively to this, especially if home prices continue to decline and the overall economic outlook is clouded by global economic distress,” credit rating agency Fitch said in a statement to CNBC. .
Fitch emphasized that it would take a series of events, not just one, to drive the stress scenario outlined in the report.
Analysts said that if weak market sentiment continues for the rest of this year, the analyzed industries could be negatively affected over the next year.
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