Analysts and developers have stated that despite the Chinese Communist Party’s attempts to push local state-owned enterprises to purchase unsold properties in order to clear housing market inventories, the limited scale of the plan and the potentially low purchase prices may not provide much assistance to cash-strapped developers.
Last month, the CCP government announced a 300 billion yuan (approximately $410 billion) loan mechanism, aiming to provide 500 billion yuan in financing to local state-owned enterprises and requiring these enterprises to purchase completed unsold properties at a “reasonable price” to convert them into affordable housing.
However, some private developers revealed to Reuters that due to the small scale of the loan mechanism, which is estimated to be implemented only in major cities with affordable housing, it is challenging for their projects to be selected. Even if selected, state-owned enterprises may offer prices that are too low.
The cautious stance of developers could pose a challenge for Beijing. Despite a series of support measures in the past two years, the real estate market has failed to rebound, and the current property crisis remains a significant drag on the Chinese economy.
On May 30, the government of Guangzhou’s Xintang Town announced that it would purchase “market-priced commercial housing” at cost as resettlement housing, making it the first local government to issue such an announcement following the introduction of the measure.
According to reports from mainland Chinese media, a project jointly owned by state-owned enterprise Greenland Group and major developer Vanke Group has already submitted an application.
Some developers have expressed that purchasing at cost (around 20-30% lower than market price) exceeds their expectations.
A senior executive of a defaulting private developer stated that if other cities offer similar pricing to Xintang Town, his company would be interested in applying, but he anticipates that the prices would be even lower, insufficient to repay construction loans.
The executive from the Shanghai-based developer remarked, “If we can’t even cover development loans, how can we repay? Banks wouldn’t agree either.”
Analysts from Citigroup and Bank of America suggest that to ensure returns for state-owned enterprises, prices need to be discounted by 50%, as the selling prices of affordable housing units are typically 10-50% lower than private residences.
Even if developers manage to sell completed apartments to state-owned enterprises, local governments may require the proceeds to be used for existing projects rather than debt repayment.
Another defaulting developer executive commented, “As a listed company, this offers no help to us or our overseas debt.”
Research firm GaveKal Dragonomics estimates that based on market prices, the 500 billion yuan for home purchases can only absorb 12% of the housing inventory; however, at discounted prices, it could clear 20% of the inventory.
Standard & Poor’s indicates that converting existing inventory into affordable housing will increase transactions for lower-end housing and decrease overall property prices.
The CCP’s Ministry of Housing and Urban-Rural Development, the People’s Bank of China, the top banking regulator, and the local housing and construction department of Guangzhou have not responded to Reuters’ requests for comments. Greenland Group and Vanke have also declined to comment.
Esther Liu, a credit analyst at Standard & Poor’s, mentioned that only a few struggling developers will benefit from this initiative. For many struggling developers, the lack of a significant inventory of completed units is a bigger issue than completing projects.
It remains uncertain what prices state-owned enterprises will offer. Meanwhile, some bankers suggest that the plan could deteriorate the asset quality of state-owned enterprises, making it challenging to generate sufficient profits to repay bank loans.
Banks can borrow from the 300 billion yuan refinancing mechanism at an interest rate of 1.75%, ultimately providing 500 billion yuan to state-owned enterprises.
Analysts estimate that overall, state-owned enterprises must pay around 2.5% interest on these loans. A banking executive stated, “While the plan benefits the real estate industry, it is not favorable for state-owned enterprises and banks because fundamentally, you are transferring some risks to them.”
It is evident that real estate is a hot potato, with both banks and local governments avoiding risks.
In February of last year, the People’s Bank of China launched a 100 billion yuan refinancing scheme for eight cities’ local governments to purchase housing inventory, but as of the end of March 2024, only 20 billion yuan had been utilized.
Zerlina Zeng, a senior analyst at CreditSights, stated, “Considering that banks and local state-owned enterprises must bear full credit and investment risks, we believe the implementation risk is very high.”