Barclays has a crack at the Chinese property crash today:
Lifting lockdowns crucial for easing measures to take effect…
We maintain our forecast of a 20% y/y decline in contracted sales in 2022e (China Property: Cautious on high-cash-price bonds, 2 March 2022), but downside risks increase if lockdowns are lifted later than we expect. We forecast a 50-55% y/y decline in contracted sales in April, and a 40-45% y/y decline in contracted sales in 2Q22 (1Q22: -50% y/y), assuming sequential recoveries in May and June when lockdown restrictions are set to be lifted gradually. We expect contracted sales to return to y/y growth in late 3Q22 at the earliest.
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High-frequency data (Figure 7) shows that the post-Lunar-New-Year stabilization in the property market was distorted by the Omicron outbreak. At 25 April, units sold in the top 30 cities over the previous 30 days declined 49% y/y or 7% m/m, led by Tier 1 cities.
… and easing restrictions should begin no later than late May
Based on the contracted sales data from 2011-21, we found that June has been the most important month of the year, contributing 10.9% of the full-year contracted sales on average.
Hence, the lifting the lockown measures and encouraging business normalisation before late May will be critical for developers to achieve their sales target for June.
As a reference, historically, March and April combined accounted for 16.8% of full-year contracted sales. Despite the common belief of “a stronger 2H”, we note that historically 1H accounted for 49% of the full-year contracted sales on average. Nonetheless, the slippage in these two months caused by the Omicron outbreaks may also affect the construction activity and, hence, planned saleable resources in 2H22.
Rising non-payment and extension risks
In April, the failure to settle missed coupons within the 30-day grace period led to defaults of Zhenro bonds. Moreover, Sunac, Logan and Ronshine have not yet paid the coupons due in April. These events underscore the potential disruptions related to COVID-19 on developers’ repayment plans. Meanwhile, Shimao Group’s onshore listco Shanghai Shimao is currently working on an extension plan for one of its onshore bond putable in April.
We expect rising non-payment and extension risks for developers with near-term payment dues.
We summarize the upcoming key dollar bond principal and coupon payments, and onshore bond and ABS payments in May below.
Upcoming key dollar-bond coupon payments in May
China SCE (2 May), Sino-Ocean Group (5 May), CIFI (7 May), Central China Real Estate (7 May), Powerlong (8 May), KWG (10 May), Ganglong China (7 May), Shui On Land (12 May), Greenland (13 May), CIFI (13 May), Powerlong (13 May), R&F (17 May), Agile (17 May), CIFI (17 May), Road King (18 May), Hopson (18 May), Jingrui (19 May), Zhongliang (19 May), China South City (20 May), Seazen Holdings (20 May), Yanlord (20 May), Redsun (21 May), Logan (23 May), Central China Real Estate (24 May), Agile (25 May), Country Garden (27 May), Jinke (28 May), Times China (30 May), Logan (31 May).
Upcoming key USD bond principal repayments in May
Jiayuan (2 May), LVGEM (17 May), Zhongliang (19 May), Redco (27 May). Moreover, Logan’s perpetual bond will be callable on 31 May, although we believe the company is unlikely to call. Upcoming key onshore bond and ABS repayments in May Guangzhou R&F (puttable on 9 May), Logan (puttable on 13 May), Seazen (17 May), Shimao (22 May), Radiance (puttable 23 May), Greentown (25 May), Jinke (30 May), Shimao (31 May)
I have my doubts. MY base case is that it is not going to get much better unless or until Beijing releases the “three red lines” policy that is strangling property developers. So long as they are dying, the counterparty risk for buyers is the key input into activity levels.
In the meantime, property sector dynamics will get worse and all attempts to stimulate infrastructure will be severely hampered by crashes land sales that punch a huge hole in local government finances. To wit:
By the end of March 2022, the residential inventory turnover in 80 cities increased to 20.6 months, versus past three-year average of 12.3 months, according to CRIC (Figure 11). This compares with the recent peak of 20.3 months in early 2020 (due to the first COVID-19 outbreak in China) and 19.7 months in 2014, 19.4 months in 2015 (before the launch of the shanty-town inventory clearance programme) and 25.7 months, the historical peak in early 2012, when home purchase restrictions were first introduced in various major cities after 2010.
• The supply and demand in Tier 1 cities remained robust at the end of March 2022 , with the residential inventory turnover at 15.5 months, versus 21.5 months in Tier 2 cities and 25.8 months in Tier 3 cities (Figure 12).
The longer time to digest the unsold inventory was mainly due to the sharp decline in the GFA sold (Figure 14); the unsold residential housing inventory level in 80 cities was largely stable at 2% higher than past three-year average. While unsold inventory increased 37% from the recent trough in 2017, it was 13% below the historical peak in December 2014.
Real-estate investment contracted by 2.4% y/y in March, compared with growth of 3.7% y/y in Jan-Feb. New starts (March: -22%, Jan-Feb: -12%) and floor space under construction (March: – 21%, Jan-Feb: +2%) contraction went deeper in March. Contraction in floor space completed also widened to -16% in March from -10% previously. Meanwhile, home sales decreased to -18% in Mach from -10% in Jan-Feb. We expect downward pressures on property investment to persist in Q2 (China: GDP downgrade on Omicron, 18 April 2022).
The land market remained weak, although some cities launched the first round of land auctions of this year with bidders taking a cautious stance. As at the end of March, only c.30% of top 100 developers had acquired land parcels in the auctions, according to CRIC data. The aggregate spending on purchases by the top 50 developers in March was less than CNY40bn, down 84% y/y and 28% m/m (Figure 17). Active buyers in first two months, including Greentown, Binjiang and China Resources Land, have slowed their investments due to a weak physical property market.
Growth is sagging, BofA:
BofA China ACT turned negative in Mar
Our BofA China Activity Coincident Tracker (BofA China ACT) weakened to -1.4% yoy in Mar, significantly lower than a revised reading of 6.6% in Jan-Feb. Passenger turnover turned negative amid lockdowns in major cities under zero-Covid policy. Real retail sales, fiscal revenue, real export, electricity production and port throughput also slowed. Estimated growth of financial services proxy ramped up.
Covid curbs continue to weigh on growth in Apr
The BofA China ACT signals that economic momentum deteriorated significantly in Mar, especially in service sectors, in line with the trend seen in official activity growth data.However, the situation has worsened further in Apr, as pandemic control measures are weighing heavily on growth, not only on services and consumption, but also spreading to logistics and production. We have downgraded our real GDP growth forecast for 2022 to 4.2% from 4.8% last week, and lowered second quarter yoy GDP growth forecast to 4.0%. We expect policy makers to ease credit controls further and lower funding costs, as well as to boost infrastructure investment in the coming quarters.
Even as China passes through this episode of OMICRON and sees something of a rebound, the property market is going to weigh heavily. With fiscal and monetary transmission impaired accordingly, expect more easing and an even weaker CNY: