By Clare Jim and Ziyi Tang
HONG KONG/BEIJING (Reuters) – China’s efforts to clear vast inventories by converting unsold homes into affordable housing are unlikely to help cash-strapped developers due to the program’s limited size and potentially low prices, analysts say and developers.
As part of a support package for the crisis-hit real estate sector, Beijing last month announced a plan for a 300 billion yuan ($41 billion) loan facility that could result in 500 billion in bank financing for local state-owned enterprises (SOEs). ) to purchase completed and unsold homes.
Chinese banks are expected to provide cheaper loans through the facility to state-owned enterprises, backed by the central bank, to help them buy the houses at “reasonable prices” from developers and convert them into affordable housing.
However, some private developers are seeing very few, if any, of their projects selected as the credit facility is inadequate and the program is expected to be launched only in larger cities where affordable housing is available. Price offers from state-owned companies are also likely to be low, they say.
Developers’ cautious stance could pose a challenge for Beijing as waves of stimulus measures over the past two years fail to revive the sector, which at its peak accounted for a quarter of GDP and is still is a major drag on the economy.
Xintangzhen, a city in Guangzhou, issued a notice to purchase “suitable housing stock” for resettlement housing on May 30, the first local government to do so after the relief package.
The local government would buy the houses at cost, China Real Estate Business, a media outlet run by the housing authority, reported, citing the report.
A project co-owned by state-owned Jinmao and major developer Vanke had signed up, the news report said.
Some developers said buying at cost, which means a 20-30% discount on the market price, was better than expected.
A senior executive at a private developer who has defaulted said his company would be interested in applying if other cities make similar offers to Xintangzhen, but he expects the offers will be low and insufficient to secure construction loans to cover.
“If it is not even enough to cover the development loan, how are we supposed to repay the loan? The lending bank would also disagree,” said a senior official at a Shanghai-based developer, who asked not to be identified due to the sensitivity of the developments. matter.
However, analysts at Citi and Bank of America have said that discounts of 50% on prices are needed to ensure modest returns for the state-owned companies, as affordable housing is typically sold at discounts of 10 to 50% to private homes.
Even if developers can profit from the sale of completed apartments to state-owned enterprises, local governments can demand that the proceeds be used to complete existing projects rather than pay off debt.
“This will not help us as a listed company or service our debt abroad,” said an executive at another developer in default.
Gavekal Dragonomics estimates that at average market prices, 500 billion yuan in purchases could pay for 12% of the housing stock, or 20% if purchased at a discount.
S&P said converting existing stock into social housing would also increase the number of transactions at the lower end and reduce overall prices.
China’s Housing Ministry, central bank, top banking regulator and Guangzhou’s local housing authority 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 handful of distressed developers will benefit,” said credit analyst Esther Liu of S&P Global Ratings. “(Completing construction) is the problem facing the distressed developers. They don’t have a lot of completed inventory.”
As developers wait for clarity on SOE demand and price offers, some bankers say the affordable housing program could lead to a deterioration in asset quality as SOEs would struggle to generate enough profits to repay bank loans.
Banks can borrow from the 300 billion relending facility at an interest rate of 1.75% to finance 60% of the loans they offer to state-owned enterprises.
Analysts estimate that state-owned enterprises would have to pay a total of about 2.5% interest on these loans, comparable to average rental yields in China.
“This is good for the real estate sector, but bad for the state-owned companies and the banks, because you are essentially passing on some risk to them,” said the first director, who asked not to be named because he is not authorized to speak to the media. speak.
It is fair to say that banks and local governments are risk averse.
The central bank launched a 100 billion yuan relending program in February last year for local governments in eight cities to buy housing stocks – of which only 2 billion yuan had been tapped by the end of March 2024.
“We see high execution risk as banks and local state-owned enterprises have to fully bear credit and investment risks,” said Zerlina Zeng, senior credit analyst at CreditSights.
However, central government support has attracted more visitors to the top cities after the latest stimulus package, which included lowering down payments and eliminating mortgage rate floors, analysts and developers say.
“The central government has stepped up its support; the turning point is the significant change here,” said Karl Choi, head of Greater China real estate research at Bank of America.
($1 = 7.2455 Chinese Yuan)
(Reporting by Clare Jim in Hong Kong and Ziyi Tang in Beijing; Editing by Sumeet Chatterjee and Jacqueline Wong)
