RESEARCH

Inside China's Vast

Property Market

Published April 3, 2019

 

With the world's largest housing market, China has experienced a boom in construction that began in 2010 and remains a key driver for growth and household wealth. In 2018, primary residential sales reached 12.6 trillion yuan ($1.9 trillion) according to China's National Bureau of Statistics.

Due to its strategic importance, the real estate market - which also includes office and retail property - is a major target of investment and a closely watched gauge of China's economic health.


The Climate in 2019


Fundamentals in China's property sector are still 'reasonably resilient' and supported by sustained demand in major cities, according to expert panelists at J.P. Morgan's Global Emerging Markets Corporate Conference in Miami.

The discussion highlighted the low vacancy rate in tier 1 and 2 cities such as Shanghai and Dalian respectively - which are defined by criteria such as GDP and population - and this is offsetting slower demand in lower-tier urban centers.

Over the past few years, the Chinese government has launched a far-reaching initiative targeting so-called shantytowns for redevelopment and this is fueling construction and sales in low-tier cities, according to panelists. Other factors boosting demand include the creation of new industries and an increase in the availability of mortgages. Property prices are not rising sharply in top-tier cities due to restrictive policies that the government imposed to slow down housing sales amid concerns of an overheating market, creating room for an easing of some of the restrictions.

In terms of real estate companies, the major players have increased market share: Consolidation began in 2015 and the top 20 developers now control 44% of the market, an increase from 28%. At the end of 2018, land prices saw a significant correction of between 25 - 30% and large developers with continued access to credit locked in plots at attractive prices, taking more market share. Returns on these investments are expected to be materially higher and this has helped the companies obtain favorable rates in the bond markets.

Panelists suggested investor sentiment around Chinese property bonds is generally positive again, especially given current valuations of the well-known BB-rated issuers. This has enabled developers to lengthen the tenure of new issues to 3 to 5 years instead of 2-year papers, as was the case toward the end of 2018. Last year, some $20 billion worth of bonds were issued - amounting to a third of the total market. This year, companies have already issued some $16 billion in debt, although experts said they expect supply to decline, as some developers have front-loaded financing, allowing them flexibility to wait for better rates.

Created with Sketch. 44%
TOP 20 DEVELOPERS NOW CONTROL 44% OF THE MARKET

The Market to 2025


China's residential development is expected to remain the largest in the world, driven by an urbanization trend that is set to continue for at least the next 10 years, according to a recent report by J.P. Morgan. While China's top-tier cities are largely developed with a population the size of the U.S., its lower-tier cities are still developing with an accompanying level of home buying.

However the industry is approaching a mature stage: The report details how the boom in the residential market between 2010 and 2020 is shifting debt from the government to households and by 2025 the process will be mostly finished. Debt such as mortgages as a percentage of GDP likely will increase and - combined with a slowdown in household formation - the residential sales market likely will eventually shrink to around 60-70% of its current size.


China household formation breakdown


5 10 15 20 25 (in millions) 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E Urban marriage New urban family from urbanization Shanty town redevelopment Implied upgraders / investment demand Source: NBS, CEIC, J.P. Morgan estimates

In top-tier cities, China's 10 biggest developers will obtain a market share of 80-90%, given the capital-intensive nature of the business, while two to three developers likely will remain active in lower-tier cities.

As the residential market slows, developers are expected to become more active with long-term rental properties such as shopping malls and offices, with funding costs trending down. Penetration of e-commerce in China is deep, and consequently, J.P. Morgan forecasts that by 2025, up to 60% of shopping mall tenants will be driven by the "experience" space of retail - such as cinemas, children's playgrounds and ice rinks. Further integration between online and offline shopping is expected.


Typical tenant mix of a Chinese shopping mall


20% Experience (F&B) 30% Experience (non-F&B) 30% Fashion & Accessories 10% Supermarket 10% Others Source: J.P. Morgan

In the office market, tier 1 cities likely will see sustained demand from financial institutions, while tier 2 cities should soon become a regional hub for local businesses. J.P. Morgan projects that between 10 to 15 provincial capitals will develop significant demand for office space in the next 10 years.

x

Related Insights

This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication. This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.

The Government of Venezuela (including the Central Bank of Venezuela) is targeted by US sanctions which prohibit dealing in new debt or equity issued by it, or any entity owned or controlled by it, after the effective date of the sanctions program (together “Sanctioned Securities”). Additionally, Petroleos de Venezuela SA (“PdVSA”) has been designated as an OFAC Specially Designated National, and US persons are generally prohibited from any activity with PdVSA; various licenses, however, may impact the permissibility. Nothing in this report is intended to be read and construed as relating to, encouraging or otherwise approving or promoting investment or dealing in such Sanctioned Securities. Clients should be aware of their own obligations and those of JPMorgan Chase & Co, its affiliates and/or subsidiaries under applicable US sanctions when making investment decisions.

 

Copyright © 2019 JPMorgan Chase & Co. All rights reserved.