October 1, 2022
real estate

BEIJING — China’s real estate woes could spread to other major sectors if problems persist, with three companies particularly vulnerable, according to ratings agency Fitch.

Investors have been worried since last year that the financial woes of Chinese property developers could spread to the rest of the economy. Over the past two months, many homebuyers defaulting on their mortgages have rekindled the woes of developers, while China’s economic growth slows.

“If timely and effective policy intervention is not implemented, the housing market crisis will be prolonged and have immediate impacts beyond the real estate value chain across various sectors in China,” Fitch analysts said in a report on Monday. shall be.”

Under such a stress scenario, Fitch analyzed the impact on more than 30 types of companies and government entities over the next 12 to 24 months. The firm found three that are most at risk of real estate problems:

 

1. Asset Management Companies

These firms have “substantial amounts of assets backed by real estate-related collateral, exposing them to protracted problems in the real estate market,” according to the report.

 

2. Engineering, Construction Companies (Non-State)

“The sector as a whole is struggling from 2021… they have no competitive advantage in exposure to infrastructure projects or access to financing over their [government-related] peers,” the report says. .

 

3. Small Steel Producers

“Many have been operating at a loss for some months and could face liquidity problems if China’s economy remains weak, particularly in the case of over-leveraging in the sector,” the report said. ”

Construction accounts for 55 percent of China’s steel demand, Fitch said.

The slowdown in real estate has already dragged down broader economic indicators, such as fixed-asset investment and furniture sales, a component of retail sales.

Fitch noted that government data showed residential home sales fell 32 percent in the first half of this year. The report cites industry research showing that the 100 largest developers fared possibly even worse, with sales falling by 50 percent.

 

Impact On Other Sectors

While Fitch’s base case assumes that property sales in China will return to growth next year, analysts warned that “deteriorating domestic buyer confidence could slow the pace of the sales recovery we saw in May and June.” I saw.”

Since late June, many homebuyers have suspended mortgage payments to protest construction delays on apartments they have already paid for, affecting developers’ future sales and cash flow. A major resource is at risk. Developers in China often sell houses before they are completed.

“Fitch believes the recent increase in the number of homebuyers suspending mortgage payments for stalled projects points to the potential for China’s housing crisis to deepen, as declining confidence hampers the sector’s recovery.” , which will ultimately affect the national economy,” the report said. .

Analysis provided by Fitch has generally found that large, central government-affiliated companies are less vulnerable to real estate deterioration than smaller companies or companies affiliated with local governments.

Fitch said smaller and regional banks, which account for about 30 percent of the banking system’s assets, face more risks. But the rating agency said risks to Chinese banks in general could increase if authorities significantly ease lending conditions to troubled real estate developers.

According to the report, the least vulnerable to real estate problems were insurers, food and beverage companies, power grid operators and national oil companies.

 

House Prices In The Spotlight

Chinese property developers came under pressure about two years ago when Beijing launched a crackdown on companies’ heavy reliance on loans for development.

Numbers like the vacancy rate give an idea of ​​how big real estate problems are.

The vacancy rate for residential properties in China’s 28 major cities averaged 12 percent, according to a report last week by the Beike Research Institute, a holdings unit of the Chinese real estate sales and rental giant.

That’s second only to Japan globally, according to the report, and higher than the U.S.’s 11.1 percent vacancy rate.

According to the report, if there are strong expectations of house price declines, those vacant apartments could increase the oversupply of the market and increase the risk of further price declines.

 

Limited State Support

This year, many local governments began easing restrictions on home purchases to boost the real estate sector.

But despite the latest mortgage protests, Beijing has yet to announce widespread support.

“Even if the authorities intervene aggressively, there is a risk that new home buyers will still not respond positively, especially if house prices continue to fall and the global economic downturn continues to weaken the general economy. The outlook is clouded.”, Fitch Ratings said in a statement said Statement to CNBC.

Fitch stressed that it would take a series of events rather than just one to trigger the stress scenario presented in the report.

Analysts say that if the real estate market weakness persists for the remainder of this year, the analyzed industries may be adversely affected during the next year.

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