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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%

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.


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