China Takes Bold Steps to Revive Struggling Real Estate Market

China is working hard to support its struggling property market in order to revive growth in the country's economy, which has been severely impacted by years of Covid restrictions.

The beginning of the year has seen a flurry of activity, with plans to ease restrictions on borrowing by developers and address the risk of “capital chain breaks” in the sector. Authorities are also considering extending lower mortgage rates to fuel home purchases and capping commissions for real estate agents.

The government's recent moves are a follow-up to its sweeping rescue plan from November, which has shown little immediate effect. The nation is struggling with a wave of infections after abruptly abandoning its Covid Zero approach, and this has led to a slump in new home sales. Last month, new home sales fell by 31%, underscoring the challenges the government faces in reversing the downturn.

Shen Meng, a director at Beijing-based investment bank Chanson & Co., said that the recent measures will definitely alleviate developers' debt pressure and improve their liquidity. However, he added that they may have little or very limited positive effect on the sector, since the core problem is households' quite weak interest in buying new homes.

Here are some of the recent support measures that China has announced or is said to be considering for the sector:

China is planning to relax restrictions on developer borrowing, which will dial back its stringent “three red lines” policy. This policy exacerbated one of the biggest real estate meltdowns in the country’s history, so relaxing it could help to improve the situation.

According to a recent study, two-thirds of the top 30 Chinese developers have crossed at least one red line. This is a significant finding, as it highlights the need for greater regulation and oversight in the Chinese development industry.

According to people familiar with the matter, Beijing may allow some property firms to add more leverage by easing borrowing caps and pushing back the grace period for meeting debt targets set by the policy. The deadline could be extended by at least six months from the original June 30 date, the people said.

In a recent interview with the official Xinhua News Agency, China’s housing minister, Ni Hong, pledged further efforts to boost confidence in the property market, ward off risks, and steer the industry onto a “high-quality development path” in 2023. The minister also vowed to lower down payment ratios and mortgage rates for first-home buyers. This is good news for those looking to purchase property in China, as the government is committed to making the process more accessible and affordable.

Authorities are considering implementing a nationwide cap on property commissions, which would likely be set at a range of 2% to 2.5% of the sale price, according to people familiar with the matter. The cap, if it is put in place, would likely be adjusted every one to three years based on market conditions, the people said.

China is extending measures that were introduced in September which allow for lower mortgage rates for first-time home buyers if newly constructed house prices drop for three consecutive months.

According to a statement from the central bank and banking regulator, cities are eligible to maintain, lower or remove minimum interest rates on loans for first home purchases. This means that cities can choose to keep, lower, or remove the minimum interest rates that are currently in place for these types of loans.

Private equity funds that raise money for residential property developments in Beijing have resumed operations after being halted in 2021, according to sources familiar with the matter. This comes as a relief to many in the real estate industry who were impacted by the temporary suspension.

The Financial Stability and Development Committee has asked banking and securities regulators to help improve the financial situation of some of the country's largest and most important developers, according to people familiar with the matter. This move is intended to help shore up the balance sheets of these companies and protect them from financial difficulties.

The government could provide equity financing and loans to help spur acquisitions and the creation of real estate investment trusts.

The central bank has promised to improve the quality of debt in the property sector and to meet the industry's reasonable financing needs. It will encourage mergers and acquisitions and restructuring in the sector.

The recent efforts by Chinese authorities to revive the country's ailing property sector seem to be paying off, with investors showing renewed interest in the sector. According to Bloomberg Intelligence, an index of Chinese property companies has risen 72% from its low in October.

Property has become a key concern for global investors, said Winnie Wu, chief China equity strategist at Bank of America Corp. While recent measures offer downside protection, Wu said that the revival of developers will still depend on the recovery in home sales and their cash-generating capabilities. Wu added that this recovery will hopefully come with the economic reopening and recovery.