A government crackdown on rising prices, tightening credit and rising interest rates present a challenging environment for Chinese property developers, but attendees at a real estate forum in Shenzhen, China, remain optimistic.
Between January and April, Chinese home sales grew 9.5% year over year, and contracted sales of most listed developers increased by more than 20%, Choi said. The analyst and his team have been named top property analysts in the Asia-Pacific region for the past eight years by Institutional Investor magazine.
Although interest rates have been rising, homebuilders and developers with financial difficulties can still remain in the game, since market demand is firm, and property assets are still valuable and can be sold to bigger players, Choi said.
For industry leaders such as Country Garden Holdings Co. Ltd., Sunac China Holdings Ltd. and China Evergrande Group, increasing market share is the name of the game, Choi said. These developers can capitalize on the rapid consolidation of the sector and leverage their financing advantages to grow.
Citi expects that by 2020, the top 10 Chinese developers will hold a market share of 40% in the country. "It's a winner-takes-all market," Choi said.
Challenges in the financing environment were on the minds of many of the conference's attendees. According to data from real estate services provider E-House (China) Holdings Ltd., the average financing costs of offshore bonds, domestic corporate bonds and mid-term notes issued by 108 major Chinese real estate companies rose in 2017 compared to 2016.
Increased pressure on the use of funds from Chinese regulators was also a topic of discussion. For example, capital raised through stock exchange bond markets in Shanghai and Shenzhen can only be used to repay bonds previously listed on the bourses, and not for repaying mid-term notes or other types of borrowings.
Nevertheless, E-House co-President Ding Zuyu said, strong home sales in recent years have enhanced the sector's ability to pay off debt, and financial risks are "controllable."
E-House data shows that the average net gearing of the homebuilding development sector declined to 89.87% by the end of 2017, compared to 91.32% a year earlier.
Industry consolidation is accelerating among homebuilders, providing opportunities for financially strong companies to increase their land banks while squeezing out smaller players.
Moreover, Citi's Choi said the sector is entering an era of diversification and focusing on investment properties that generate recurring revenue, such as shopping malls and office buildings, which will be the primary new drivers of growth.
While core property sales are slowing, homebuilders and developers are leveraging their brand and scale to participate in peripheral businesses, such as real estate agencies, property management, commercial real estate, and even dabbling in the education, culture and entertainment sectors, Choi said.
Choi forecasts a sharp increase in commercial real estate values in China, as insurance companies and pension funds seeking stable returns focus on this field, benefiting developers with high-quality commercial portfolios, he said.
