China’s Property Market
Chinese economic data was noticeably weaker in May raising concerns over a slowdown in the second half of 2018. According to China's National Bureau of Statistics (NBS), urban fixed asset investment grew by just 6.1% between January to May compared to the same period a year earlier, the slowest rise since 1998, and retail sales rose by 8.5 per cent y/y, its slowest rate since 2003. The one bright spot in the data set was the real estate sector which seems to be holding up relatively well despite a renewed effort by China’s Housing Ministry to warn local authorities about the current market rebound and vowing to crack down on any cities in violation.
According to the NBS, China’s average new home price in 70 major cities rose 0.7% in May, the fastest pace since June 2017 - compared with a 0.5% increase in April, and up 4.7% y/y. For the month, residential property sales by area grew 8.46% y/y with the value of turnover increasing 23.3% from the same period a year earlier. This increase in activity seems to be boosting developer sentiment with new home starts up 21% in May, a two year high.
One factor that may be helping the sector is that it seems to be immune from the government credit clampdown so far, with new household loans, mostly mortgages, rising 16% in May from April and accounting for 53% of total new loans. With the current momentum, most analysts are expecting that the June figures will be better than those in May.
The major developers have been the primary beneficiaries of these macro trends. Two years into property cooling measures, the bigger firms such as China Vanke and Country Garden have been able to take advantage of their stronger financial positions and multiple financing channels to sustain steady volumes and to outbid and outprice smaller and medium companies in land auctions. They have also been able to take advantage in the increase in M&A as these lower tier rivals need to merge to survive.
In China’s Vanke’s results, they outlined that their land acquired this year through M&A is roughly the same as that through auctions which was probably a strong advantage considering that national average land prices through tender in May reached 9,600 yuan per square meter, compared with 4,300 yuan for those through acquisitions
This benefit can also be seen in sales volume data. For May, China's top 100 developers saw sales rise 17.7% in May from the previous month, the fastest growth this year, according to property research firm China Real Estate Information Corp.
The main concern about this sector has been the level of USD debt, particularly in the scenario of higher US rates and a stronger USD. Historically, China property developers have been the largest issuers of USD denominated debt in the offshore bond market. Most of this debt isn’t hedged. According to one hedge fund, Mainland companies sold $74bn of dollar debt last year, while Chinese property companies, as a group, expected to sell about $100bn between 2017 and 2018. Most of this debt starts to mature next year and in 2020.
The VFTP Thematic Portfolio doesn’t hold Chinese property companies preferring financials, technology companies and healthcare firms. However, we think the large developers will continue to perform well as they take advantage of their financial position to sustain any sales slowdown, outbid smaller firms in auctions and take advantage of any M&A activities.