High-rise buildings are illuminated at night in the West Coast New Area in Qingdao, east China's Shandong Province, on March 22, 2024.
norphoto | norphoto | Getty Images
BEIJING — China's real estate woes are likely far from over, and the industry's woes must be addressed quickly if overall GDP growth is to rebound significantly, according to a report released Thursday by global investment firm KKR.
That's one of two key takeaways from the recent trip to China by the firm's head of global asset allocation and macro, Henry McPhee. This was his fourth visit in just over a year.
“The fundamentally built real estate industry needs to be addressed — and quickly,” he said in the report, which counts Changchun Hua, KKR’s chief economist for Greater China, among co-authors.
“Secondly, confidence must be restored to push savings downward,” McVeigh said, noting that this would motivate consumers and businesses to spend on upgrading to higher quality products, as promoted by Chinese authorities.
Real estate and related sectors once represented about a fifth of China's economy or more, depending on the breadth of analysts' calculations. The real estate industry has declined in the past few years after Beijing's crackdown on developers' heavy reliance on debt for growth.
Based on comparisons with housing corrections in the United States, Japan and Spain, “China's housing market correction may only be halfway there” in terms of its depth, the KKR report said.
“Price and volume must come under pressure to end the purge,” the report said. “So far, though, there has been quite a downturn in volume.”
While the KKR report did not provide many details about the outlook for specific real estate policy, the authors said that further measures by Beijing to improve China's real estate sector “could meaningfully change investor perception.”
Amid geopolitical tensions, the country's declining real estate market and falling stocks have caused many foreign institutional investors to stop investing in China.
“According to some of our survey work, many distributors have considered reducing exposure to China to 5-6%, down from 10-12% today at a time when we believe fundamentals in the economy are likely to bottom out,” the KKR report said.
Much of the official Chinese data to be released at the beginning of the year has exceeded analysts' expectations.
Chinese officials said the real estate sector is still in a period of adjustment, while Beijing shifts its focus toward manufacturing and what it sees as “high-quality development.”
Authorities have also issued policies to enhance financial support for selected property developers, while many local governments – though not necessarily major cities – have significantly eased home purchase restrictions.
Withdraw properties to moderate
KKR expects a modest slowdown in China's GDP growth to 4.7% this year and 4.5% next year, with real estate and virus-related factors halved from 1.4 percentage points in 2024 to a decline of 0.7 percentage points in 2025.
“The bottom line is that with the ongoing (real estate) correction as well as some potential political support, we believe the macroeconomic impact should ease slightly over the next few years,” McVeigh said in a separate statement. . He is also KKR's chief investment officer on balance sheet.
Catering, accommodation and wholesale trade are expected to modestly increase their contribution to growth in the next two years, while digitalization and the shift towards a greener, more carbon-neutral industry are expected to remain the biggest drivers of growth, according to the report.
For investors, the report said, a more important development than China's GDP increase will be whether authorities can make it easier for companies and households to tap capital markets.
“Fixing weak spots in the economy, particularly around housing, will ultimately improve the cost of capital, and will also allow new consumer businesses to access capital markets at potentially better rates if real estate and trust perform better,” McVeigh said. In the statement.
In March, Beijing announced a GDP target of about 5% for this year. Housing and Urban-Rural Development Minister Nee Hong said last month that developers should go bankrupt if necessary, and that authorities would boost affordable housing development.
Recent data has indicated some stabilization in the real estate sector slowdown. The seven-day moving average of new home sales in 21 major cities fell 34.5% year over year as of Monday, better than the 45.3% decline recorded the previous week, according to Nomura citing Wind Information.
Nomura Bank said that compared to the same period in 2019, average sales fell by only 27.8% as of Monday, compared to a 47% decline in the previous week, noting that most of the improvement occurred in the largest cities in China.
Consumer outlook
KKR said most of its domestic portfolio is in consumer and services companies, whose businesses reflect how Chinese in the middle to upper income range spend modestly to develop their lifestyles.
“Revenue growth is strong, margins are holding up, and consumers are spending on less visible items like smart homes, pets, and leisure activities,” the report said. “Domestic travel is also strong.”
Retail sales rose a better-than-expected 5.5% year-on-year in January and February, supported by strong growth in spending for the Lunar New Year holiday.
In the longer term, KKR still expects China to be able to follow historical precedent in changing policy to become “more investor friendly.”
The report said: “While our message is not a clear signal to rely on, it is a reminder – using history as our guide – that if China adjusts its domestic policies to be more investor-friendly (particularly with respect to supply-side reforms), this could rebound.” The market is down significantly from current levels.
