It can only get better. China's property market has lurched from crisis to crisis since China Evergrande first encountered liquidity difficulties in the second half of 2021. However, support measures launched by the Chinese government late last year have drawn a line under this downturn. S&P Global Ratings now believes the sector is poised for a slow recovery in 2023.

In December 2022, we held multiple webinars and investor meetings to discuss the outlook of the China property sector. In this report, we address key investor questions from those interactions, mainly centering on the sales outlook, policy direction, funding conditions, and the credit quality of the China property sector.

Frequently Asked Questions

When will property sales recover? What signals might indicate such a turnaround?

In our view, China's property crisis may arrive at a turning point in the next three to six months, with a recovery possible in the second half of 2023.

A stabilization in sales volumes, a reduced reliance on price discounts, and a resumption in land buying by private developers would comprise the surest signs of a turnaround in the physical property market.

The physical market was still weak in the fourth quarter of 2022, with property sales dropping by about 26%-27% year on year during October to November. Homebuyers' confidence may start to recover with demand stimulus and the lifting of COVID-related lockdowns.

We do not expect property sales to grow in 2023 with new construction starts and land spending dropping by about one-third in 2022.

Sales will likely fall a further 5%-8% in 2023. However, we believe sales volume will stabilize and the drop will be mostly attributable to price declines. In our view, price discounts should unlock pent-up demand for residential properties in China, especially in higher-tier cities.

How will the property market evolve after the crisis? Will state-owned enterprises (SOEs) dominate the market?

China's property market is shrinking. The asset price bubble has deflated for two reasons. First, private developers have dropped their build-and-churn models that were mostly debt-funded. And, second, China has prioritized its policy mantra that "homes are for living, not speculation." Distressed developers will unlikely regain their former scale. Most will struggle with their main task: to complete thousands of pre-sold homes while managing a debt restructuring.

The surviving developers, in our view, will squeeze through this difficult period by focusing on higher-tier cities where economies are stronger and demand for property is more resilient. The demand recovery in lower-tier cities will continue to undershoot that of higher-tier peers. In the past, incremental demand in low-tier cities mainly came from investment demand from buyers in higher-tier cities. Such buying has largely disappeared. We believe China's overall property sales will stabilize at Chinese renminbi (RMB) 12 trillion-RMB13 trillion, down from RMB18 trillion in 2021.

SOE developers will gain market share in 2023 given their relatively unfettered access to funding. The SOEs were also much more active land purchasers in 2022, and will therefore be much better positioned to capture market share than private firms in the months and years ahead.

In our view, the rise of SOE developers will transform the China residential property sector into a steadier market. SOEs will be following government policies most strictly, in particular the "homes are for living, not speculation" principle. We believe SOE developers will generally use leverage less aggressively than their privately owned counterparts, and be less inclined to push the boundaries of their financing and accounting practices. They will also put more focus on ensuring project completion.

SOE developers won't likely buy or consolidate a distressed private developer given the high leverage they would have to absorb, and the complexity of the due diligence process. We believe it will be more likely for the SOEs to acquire projects from distressed private developers. An example of which was seen with China Resources Land Ltd.'s (BBB+/Stable/--) acquisition of project companies from China Fortune Land Development Co. Ltd. (unrated) in late December.

What stimulative policy might the government unveil next, if any?

The government's focus has been on ensuring developers complete and deliver presold homes. Starting in November 2022, Beijing has rolled out significant, successive policies aimed at easing funding conditions for select developers (see table). In our view, such policies help these developers continue as a going concern--to buy land, build, grow, and prosper.

Mixed-ownership and private developers that have not defaulted on debt obligations and have not done distressed exchanges will benefit most from these policies, in our view. However, distressed developers such as CIFI Holdings (Group) Co. Ltd. (unrated), Dexin China Holdings Co. Ltd. (unrated), and KWG Group Holdings Ltd. (unrated) were also able to raise equity capital in November-December 2022. That's largely because they caught a sentiment boost stemming from these measures, in our view.

So far, most policies have targeted the supply side--mostly to restore liquidity among viable private developers. The next set of policies will likely aim at sparking pent-up property demand. Measures may include lifting home purchasing restrictions in higher-tier cities, easing down-payment requirements, and lowering mortgage rates.

In November and December 2022, local authorities lifted purchasing restrictions in major second-tier cities such as Chengdu and Nanjing. Officials have also relaxed down-payment requirements and cut mortgage rates in previously hot markets such as Hangzhou, and lifted purchasing restrictions in the Beijing suburb of Tongzhou.

We believe the government could extend its easing of purchasing restrictions to the core districts of higher-tier cities, if needed. Recently, the People's Bank of China, and the China Banking and Insurance Regulatory Commission rolled out a mechanism that gave banks flexibility to cut mortgage rates for first-time homebuyers. This mechanism is applicable for cities where primary home prices have declined consecutively over the past three months (on both a year-on-year and a month-on-month basis).

How will the financing landscape change compared with the pre-crisis period? What is the government's view on developers' offshore liabilities?

In the next 12-18 months, we expect China property developers will be much less engaged with offshore bond markets, given recent global rate hikes and low funding costs onshore. This will be particularly true for SOEs, which in any case have been more inclined to issue domestically. Offshore non-Chinese banks will also be less keen to lend to China property developers until the physical property market recovers, in our view.

However, we believe the government will provide flexibility for select property developers to obtain funding from offshore Chinese banks. According to media reports, the government guided four major state-owned banks to provide offshore funding to China property developers by providing onshore guarantees.

In December, Bank of China and Industrial and Commercial Bank of China provided onshore guarantees to Longfor Group Holdings Ltd. (BBB-/Negative/--) and Country Garden Holdings Co. Ltd. (unrated), respectively, to settle offshore liabilities. Yuexiu Property Co. Ltd. (unrated), according to media reports, is also seeking to obtain onshore guarantees from Agricultural Bank of China to settle offshore liabilities.

That said, we believe debt restructuring will be the way out for most distressed developers. Over the past couple of weeks, we continued to see developers defaulting on their debt obligations, such as Redco Properties Group Ltd. (unrated), Times China Holdings Ltd. (unrated), and Yida China Holdings Ltd. (unrated). In our view, maturity extensions buy time for distressed developers, but do not fundamentally improve their debt capital structures.

While unfolding government measures may help some A-share listed developers raise equity capital (see table), these mooted issuances must undergo a rigorous approval process.

For example, Zhuhai Huafa Properties Co. Ltd. (unrated), a locally listed SOE, has successfully lodged an application with the China Securities Regulatory Commission (CSRC) to raise equity. This meant the developer was able to get its paperwork in order, and that it met a threshold of credibility to be considered as an issuance candidate. However, the CSRC still needs to approve Huafa's A-share issuance, which is another hurdle.

Distressed developers such as China Fortune Land Development Co. Ltd. (unrated) and Greenland Holding Group Co. Ltd. (unrated) are preparing their own applications to issue A-shares. It is far from certain that the CSRC will both accept and approve their submissions, in our view.

Under what conditions would we consider positive rating actions on Chinese property firms?

Each of our rated developers will be assessed on a case-by-case basis, depending on their own credit profiles. Liquidity and leverage remain the two most important metrics. In our view, the recent government support measures have set a floor to the crisis. However, to consider positive rating actions on China developers, we would want to see a property sales recovery underpinned by a recovery in homebuyer confidence and a sustained policy environment supportive of credit and financing of property developers. Also, how developers will adapt their business model in a consolidating market with likely lower profitability will determine their credit profiles.

Editor: Jasper Moiseiwitsch

Related Research

• China's Defaulted Developers Hope For The Best, Prepare For The Worst, Jan. 10, 2023
• China Property Is Heading For A Transformation, And Maybe A Turnaround, Nov. 20, 2022