By Claire Jim and Ziyi Tang
HONG KONG/BEIJING (Reuters) – China is trying to clear a huge stock of unsold homes by converting them into affordable housing, but the programme is likely to be limited in scale and prices low enough that it won’t help cash-strapped property developers, analysts and developers say.
Beijing last month announced plans for a 300 billion yuan ($41 billion) lending scheme as part of a bailout for its crisis-hit real estate sector that could unlock 500 billion yuan worth of bank loans for local state-owned enterprises to buy completed but unsold homes.
Through the central bank-backed scheme, Chinese banks are expected to provide low-interest loans to state-owned enterprises to help them buy homes from developers at “fair prices” and convert them into affordable housing.
But some private developers believe their projects are highly unlikely to be selected because credit lines are insufficient and the program will be launched only in big cities where affordable housing is available. Prices offered by state-owned companies are also likely to be lower, they say.
Developers’ cautious approach could pose a challenge for Beijing, as a series of support measures over the past two years have failed to revive the real estate sector, which accounted for a quarter of GDP at its peak and remains a major drag on the economy.
On May 30, Guangzhou’s Xindang town became the first local government since the support measures were implemented to issue a notice to purchase “appropriate housing stock” for relocation housing.
China Real Estate Business, a media outlet run by the housing bureau, cited the notice as saying local governments would purchase the homes at cost price.
The application was reportedly for a project jointly owned by state-owned Jinmao Group and major developer Vanke Group.
Some developers said buying at cost, or a 20-30 percent discount below market price, turned out better than they expected.
A senior executive at a private developer that defaulted on its loans said his company would be interested in applying if other cities made proposals similar to Xintang’s, but he expected their offers to be low and not enough to cover construction loans.
“If it’s not even enough to cover the development loan, how can we repay it? The lending banks won’t agree,” said an executive at a Shanghai-based developer, speaking on condition of anonymity due to the sensitivity of the issue.
But analysts at Citi and Bank of America say affordable housing is typically sold at a 10-50% discount to private homes, meaning state-owned companies would need to slash prices by 50% to ensure a reasonable profit.
Even if developers could make a profit by selling completed apartments to state-run companies, local governments may demand that the proceeds be used to complete existing projects rather than to repay debt.
“This won’t help us as a listed company or repay our overseas debt,” said an executive at another property developer that has defaulted on its credit.
Gavekal Dragonomics estimates that 500 billion yuan of buying at average market prices could cover 12% of the housing stock, or 20% if bought at discounted prices.
S&P said converting existing stock into social housing would increase transactions at the lower end of the market, lowering prices overall.
China’s housing ministry, the central bank, the country’s top banking regulator and local housing authorities in Guangzhou did not respond to requests for comment. Jinmao did not respond to a request for comment, and Vanke declined to comment.
Execution Risk
“Only a small percentage of distressed developers will benefit,” said Esther Liu, a credit analyst at S&P Global Ratings. “Completing construction is an issue that distressed developers face. They don’t have a lot of completed inventory.”
While developers are waiting for clarity on demand and price offers from state-owned enterprises, some bankers say affordable housing schemes could lead to a decline in asset quality as state-owned enterprises struggle to make enough profit to repay bank loans.
Banks can borrow from the US$300 billion re-lending facility at an interest rate of 1.75 percent to cover 60 percent of the loans they provide to state-owned enterprises.
Overall, analysts estimate that state-owned enterprises will have to pay about 2.5% interest on these loans, in line with China’s average rental yields.
“This is good for the property industry but bad for state-owned enterprises and banks because it essentially shifts some of the risk to them,” said the first executive, who declined to be named as he was not authorized to speak to the media.
It is true that banks and local governments tend to be risk averse.
The People’s Bank of China launched a 100 billion yuan refinancing program in February last year to help local governments in eight cities buy housing stock, but only 2 billion yuan had been used as of the end of March 2024.
“We see execution risk as high given that banks and local state-owned enterprises have to bear the full credit and investment risk,” said Zerlina Zeng, senior credit analyst at CreditSights.
But analysts and property developers say support from the central government is boosting visitor numbers in top cities following the latest stimulus package, which includes lower down payments and the removal of minimum mortgage interest rates.
“The central government is stepping up (support) and we’re at a turning point for important change here,” said Carl Choi, head of Greater China real estate research at Bank of America.
(1 dollar = 7.2455 Chinese yuan)
(Reporting by Claire Jim in Hong Kong and Ziyi Tang in Beijing; Editing by Sumeet Chatterjee and Jacqueline Wong)
