By Clare Jim and Ziyi Tang
HONG KONG/BEIJING (Reuters) – China’s efforts to clear massive inventory by turning unsold homes into affordable housing are unlikely to help cash-strapped developers due to the limited size of the program and potentially low prices, estimate analysts and promoters.
As part of a program to support the crisis-hit real estate sector, Beijing last month announced a 300 billion yuan ($41 billion) loan plan, which could result in bank financing worth of $500 billion for local public enterprises (public enterprises). ) to buy completed and unsold homes.
Chinese banks are expected to provide cheaper loans to state-owned enterprises through this mechanism, backed by the central bank, to help them buy homes from developers at “reasonable prices” to turn them into affordable housing.
Some private developers, however, see very few, if any, of their projects selected because loan facilities are insufficient and the program is expected to be launched only in large cities where affordable housing is available. Price offers from state-owned companies will also likely be low, they say.
The cautious attitude of real estate developers could pose a challenge for Beijing, as waves of support measures over the past two years have failed to revive the sector, which at its peak accounted for a quarter of GDP and remains a major drag to the economy.
Xintangzhen, a city in Guangzhou, issued a notice on May 30, the first local government to do so after the support program, to purchase “suitable housing stock” for resettlement housing.
The local government would buy the houses at cost, China Real Estate Business, a media outlet run by the housing authority, reported, citing the notice.
A project jointly owned by state-owned Jinmao and lead developer Vanke had applied, the report added.
Some developers said buying at cost, meaning a 20 to 30 percent discount from market price, was better than expected.
A senior executive at a defaulting private developer said his company would be interested in applying if other cities made offers similar to Xintangzhen’s, but he expects the offers to be low and insufficient to cover the costs. ready for construction.
“If it’s not even enough to cover the development loan, how are we going to repay the loan? The lending bank wouldn’t agree either,” said a senior official of a Shanghai-based developer, who requested anonymity due to the sensitivity of the matter. matter.
Analysts at Citi and Bank of America, however, said 50% price reductions were needed to ensure modest returns for public companies because affordable housing typically sells at discounts of 10% to 50% compared to homes. private.
Even if developers manage to profit from selling completed apartments to state-owned companies, local governments can require that the proceeds be used to complete existing projects rather than pay down debt.
“It won’t help us as a listed company, or pay off our offshore debt,” said an executive at another credit-defaulted developer.
Gavekal Dragonomics estimates that at average market prices, 500 billion yuan of purchases would finance 12% of housing stocks, or 20% if purchased at a discount.
S&P said converting existing inventory into public housing would also increase transactions at the lower end and lower overall prices.
China’s housing ministry, central bank, top banking regulator and Guangzhou’s local housing authority did not respond to requests for comment. Jinmao did not respond to a request for comment and Vanke declined to comment.
EXECUTION RISK
“Only a handful of struggling developers will benefit,” said Esther Liu, credit analyst at S&P Global Ratings. “(Completing construction) is the problem facing struggling developers. They don’t have a lot of completed inventory.”
As developers await clarity on demand and price offers from SOEs, some bankers say the affordable housing program could lead to a deterioration in asset quality as SOEs would struggle to generate enough revenue. profits to repay bank loans.
Banks can borrow from the 300 billion loan facility at an interest rate of 1.75% to finance 60% of the loans they offer to state-owned enterprises.
In total, analysts estimate that state-owned companies would have to pay around 2.5% interest for these loans, which is similar to average rental yields in China.
“It’s good for the real estate sector but bad for state-owned companies and banks, because essentially you’re transferring some of the risk to them,” said the top executive, who requested anonymity because he is not authorized to speak to the media.
Certainly, banks and local governments are reluctant to take risks.
In February last year, the central bank launched a 100 billion yuan refinancing program to allow local governments in eight cities to purchase housing stocks – of which only 2 billion had been used by the end of March 2024.
“We see high execution risk given that banks and local state-owned enterprises must fully bear credit and investment risks,” said Zerlina Zeng, senior credit analyst at CreditSights.
Central government support, however, has attracted more visitors to top-tier cities following the latest stimulus package which includes a reduction in down payments and the removal of floor mortgage rates, analysts and developers say.
“The central government has stepped up its (support); the turning point is the big change here,” said Karl Choi, head of Greater China real estate research at Bank of America.
($1 = 7.2455 Chinese yuan)
(Reporting by Clare Jim in Hong Kong and Ziyi Tang in Beijing; editing by Sumeet Chatterjee and Jacqueline Wong)
