China properties face falling prices

The Chinese real estate sector is showing more signs of a slowdown, which will likely weigh on industry-related shares.

China Shanghai
Source: Bloomberg

The country’s largest residential property developer, China Vanke, released some underwhelming results in October.

While Q3 net profit rose 2.8%, margins were squeezed from 24.9% to 23.8%, reflecting the dip in home prices and higher land costs. Vanke had also rolled out fewer projects than planned.

‘In the short term, the situation of new supply exceeding transactions remains unchanged and inventories are rising’, warned Vanke in a filing to the stock exchange.

A similar outlook was shared by China Overseas Land’s in its earnings. The country’s fifth largest developer saw Q3 operations plunge by nearly half and warned of potential future downside risks.

Their earnings reflect the slump in home prices over the year and what we can expect to see in the near future.

According to China’s latest housing price index reading, the drop in new home prices spread further to a record 69 out of 70 cities. The latest reading for September’s prices showed a print of -1.3%, a break into negative territory for the first time in nearly two years. The Index was hovering around a reading of a 10% rise in January before drifting to just 0.5% in August.

The weaker consumer appetite has also been reflected in data on loans to the real estate sector. Loans grew at their slower pace in the first nine months, according to data from the People’s Bank of China. The central bank’s report noted that by the end of September, financial institutions in China had lent $2.73 trillion to the sector, up 18.2% year-on-year, below the 19.2% recorded for the first six months.

With the property sector contributing nearly 15% to the Chinese economy, it’s not a surprise to see real estate stocks under pressure and dragging down Chinese indices.

One stock that has been under pressure in recent months has been Evergrande Real Estate. It has lost nearly 25% since its one-year high of $3.92 in April and looks capped by a downtrend line. It currently appears to have found some support at $2.94.  

The negative sentiment has also weighed down property developer Soho China. Its stock price has dropped about 14% from its year’s high in January at $6.69.

To arrest the drop in the real estate sector, the central bank eased mortgage lending restrictions last month for the first time since the financial crisis. This means people can apply for a mortgage for a second home and enjoy a lower down payment requirement.

While this is one of the most aggressive moves by authorities to revive the sector, the impact of any measures even if successful will still need some time to trickle through into the real economy.

 

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