Mainland property market bubble or boom?
Although China’s real estate “bubble” has long been receiving international attention, its market performance has remained strong. The Chinese government has implemented a number of regulatory measures to cool down the property market. However, due to the strong real estate demand, the market has not experienced much fluctuations in the past 20 years.
For a long time, many favorable factors have supported China’s property market. These factors include the ever-increasing urbanization rate, abundant liquidity, and lack of other investment channels in the Mainland. Although we expect the market to gradually slow down in 2018, we believe that investors can still capture good investment opportunities from bonds issued by some large, high-quality developers.
Urbanization drives demand for housing
Since 2000, the proportion of urban population in China has increased from 36% to 58%, which means that as many as 300 million people have moved from rural areas to towns during this period, bringing huge demand for new housing.
There are significant differences in the demand in different regions and cities. In general, the property market in the coastal areas of East China is the most prosperous, mainly benefiting from the continuous population inflow and strong economic growth. However, high property prices have also caused these regions to be more likely to face policy tightening. On the other hand, the majority of inland third-tier and fourth-tier cities have a worsening outlook for the local real estate market because of the continued outflow of population.
Government intervention to help stabilize the market
Over the past 20 years, China’s broad money supply (M2) has continued to record double-digit growth. The implementation of capital controls in the Mainland has largely limited the possibility of the Chinese investing some of their funds in overseas markets. However, there are limited investment channels available for investment in the Mainland. Mainland interest rates have continued to be low (including bond interest and bank deposits), and fluctuations in the performance of mainland stock markets are also well known. Therefore, for many Chinese, the property market has naturally become one of the most attractive investment options.
The Chinese government’s control policies have also had a profound impact on the development of the entire real estate market. In the event of a slowdown in the property market (such as during the 2009 financial crisis), the Chinese government will also introduce various supporting measures to help stabilize the property market. However, due to strong demand, the government authorities have had to adopt a series of restrictions to curb rising property prices. This has been particularly prominent in major coastal cities.
The latest round of regulatory policies was launched at the end of 2016. This round of policies includes restrictions on purchase orders, limit orders and credit tightening. With the landing of regulatory policies, the annual growth rate of many local property markets has also dropped from more than 30% to basically stable.
Given the Chinese government’s determination to prevent property prices from rising too quickly, there is currently no indication that the authorities will relax the policy in the short term. Therefore, we expect the mainland property market to gradually slow down in 2018. Since stocks are close to the historical lows and the government has ample space to relax its policies, we think the market is unlikely to drop sharply in the short term.
Industry integration provides investment opportunities
Despite the recent efforts by the Chinese government to promote economic rebalancing, including stimulating domestic demand and supporting high-tech innovation, overall real estate is still the most important industry in terms of its contribution to the growth of GDP. It is estimated that the size of China’s property market will be approximately US$22 trillion. This is equal to about 1.8 times GDP in 2017.
The accelerated integration of the real estate industry is the most noteworthy trend in the industry over the past few years. The market share of the top 10 real estate developers in the Mainland has rapidly risen from 5.4% in 2006 to 25% in 2017. These large developers enjoy clear advantages over small developers in terms of fundraising channels and capital raising costs. We believe that large-scale developers will continue to benefit from the consolidation of the industry and become more powerful. These developers are the main investment opportunities for bond investors. In order to support the rapidly growing business, mainland developers have continued to be active in the offshore US dollar bond market in recent years. So far, mainland developers have issued US$94 billion in U.S. dollar bonds, of which about 74 billion U.S. dollars are high-yield bonds and account for more than 30% of JPMorgan’s Asia Credit high-yield bond index.
The author is PIMCO Credit Research Analyst
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