Claire Jim and Ziyi Tan
HONG KONG/BEIJING (Reuters) – China’s efforts to clear vast inventories by turning unsold homes into affordable housing are unlikely to help cash-strapped developers due to the program’s limited size and potentially low prices, analysts and developers say.
As part of a package to support the crisis-hit real estate sector, Beijing announced a 300 billion yuan ($41 billion) lending plan last month that could lead to $500 billion in bank financing for local state-owned enterprises (SOEs). ) to purchase completed and unsold homes.
Chinese banks are expected to provide cheaper loans to state-owned enterprises through this central bank-backed mechanism to help them buy houses from developers at “reasonable prices” to turn them into affordable housing.
However, some private developers believe that very few, if any, of their projects will be selected as the lending mechanism is inadequate and the scheme is expected to be launched only in major cities where affordable housing is available. Price offers from state-owned enterprises are also likely to be low, they said.
The wary attitude of developers could be a problem for Beijing as waves of support measures over the past two years have failed to revive a sector that accounted for a quarter of GDP at its peak and remains a major drag on the economy.
Xintangzhen, a city in Guangzhou, issued a notice on May 30, becoming the first local government to do so since the support package, to purchase “suitable housing stock” for relocation.
The local government will buy houses at cost, China Real Estate Business, a media outlet run by the housing authority, reported, citing the notice.
The report said the construction application was submitted by a project co-owned by state-owned Jinmao and major developer Vanke.
Some developers said that buying at cost, that is, with a 20-30% discount on the market price, turned out to be better than expected.
A senior executive at a bankrupt private developer said his firm would be interested in making a bid if other cities made similar offers like Xintangzhen, but he expected bids to be low and insufficient to cover construction loans.
“If this is not enough to even cover the development loan, how will we repay it? The creditor bank won’t agree either,” said a senior official at the Shanghai developer, who declined to be named due to the sensitivity of the situation. matter.
Analysts at Citi and Bank of America, however, say the 50% discounts are needed to ensure modest profits for public entities, since affordable homes typically sell at a 10% to 50% discount to single-family homes.
Even if developers are able to profit from selling completed apartments to state-owned enterprises, local governments may require that the proceeds be used to complete existing projects rather than pay off debt.
“This will not help us as a listed company or our offshore debt,” said an executive at another developer that defaulted.
Gavekal Dragonomics estimates that at average market prices, 500 billion yuan purchases would recoup 12% of housing inventory, or 20% if purchased at a discount.
S&P said converting existing properties into social housing would also increase the number of transactions at the lower end and reduce overall prices.
China’s Housing Ministry, central bank, top banking regulator and Guangzhou local housing authority did not respond to requests for comment. Jinmao did not respond to requests for comment, and Vanke declined to comment.
EXECUTION RISK
“Only a handful of struggling developers will benefit,” said S&P Global Ratings credit analyst Esther Liu. “(Completion of construction) is a problem faced by struggling developers. They don’t have many completed projects.”
While developers wait for clarity on demand and SOE pricing, some bankers say the affordable housing scheme could lead to a deterioration in asset quality as SOEs will struggle to earn enough profits to repay bank loans.
Banks can borrow from the $300 billion relending facility at 1.75% to fund 60% of the loans they offer to state-owned enterprises.
Overall, analysts estimate that SOEs will have to pay about 2.5% interest on these loans, which is in line with average rental yields in China.
“It’s good for the real estate sector, but it’s bad for state-owned enterprises and banks because you’re essentially transferring some of the risk onto them,” said the first executive, who declined to be named because he was not authorized to speak to the media.
Of course, banks and local governments are risk averse.
Last February, the central bank rolled out a 100 billion yuan re-lending program for local governments in eight cities to purchase housing inventory, of which only 2 billion yuan had been used as of the end of March 2024.
“We see high execution risk given that banks and local state-owned enterprises must bear the full credit and investment risks,” said Zerlina Zeng, senior credit analyst at CreditSights.
But support from the central government has brought more visitors to top-tier cities following the latest stimulus package, which includes lower down payments and the elimination of minimum mortgage rates, analysts and developers say.
“The central government has stepped up (support); the turning point here is an important change,” said Carl Choi, head of Greater China real estate research at Bank of America.
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