The China Index Research Institute recently announced that the area of new residential building transactions in Chinese cities during the New Year holiday increased by more than 20% year-on-year, with Beijing, Shanghai, and Guangzhou’s transaction areas increasing by 80%, 131%, and 74%, respectively. Meanwhile, to further revive China’s sluggish real estate industry, China’s financial regulatory authorities plan to ease the “Three Red Lines” regulatory criteria for real estate developers. Does it indicate that 2023 is an excellent investment time for Chinese property stocks?
In 2020, The Chinese government introduced the “Three Red Lines” regulation to address the debt risks of real estate companies, which include eliminating assets and liabilities to less than 70%, net debt cannot be greater than 100% of equity, and cash-to-short-term debt ratio must not be less than 1.
How does the Chinese government support domestic real estate developers?
The Chinese housing developers were supposed to fully comply with the “Three Red Lines” by the end of June this year. However, Bloomberg reported that the “Three Red Lines” policy transition period is expected to be extended by at least six months. Regulatory authorities will also gradually increase real estate housing developers’ annual debt increase limit.
In addition, the Chinese official media Xinhua News Agency reported that the government plans to launch a 21-task action plan to guide high-quality real estate companies’ assets and liabilities back to a safe level and promote the property industry’s smooth transition to a more stable development model.
Some measures include establishing a 200 billion yuan loan support program to ensure the successful delivery of residential properties. In addition, a 100 billion yuan loan will be provided to support the development of the housing rental market. The tasks also include setting up a national financial asset management company to offer special loans, which support mergers and acquisitions to reduce risk across the real estate industry.
What is the outlook for real estate investment in China in 2023?
Goldman Sachs raised the forecast of saleable real estate property in China in 2023, with a predicted total gross floor area (GFA) sales volume of around 13.3 billion square metres, which is an upward revision from the original 12.9 billion square metres but still a 7.5% decrease from last year’s expected value of 14.4 billion square metres.
With various positive news stimulating the market, the stock price of many Chinese real estate companies rebounded. From the beginning of the year to 16th January, Country Garden (2007) rose 6.69%, R&F Properties (2777) rose 4.19%, Logan Group (3380) rose 4.96%, and China Resources Land (1109) jumped 3.55%.
In addition, lifting quarantine measures in mainland China will contribute to economic activity, family income, and investment confidence, supporting an increase in housing demand. It is expected that the internal housing market will begin to recover in the second quarter of this year, making the Chinese real estate stock an investment sector worth paying attention to in 2023.
Despite the positive signs, careful stock selection is required when investing in the Chinese real estate market in 2023 because the crisis has yet to resolve fully, and developers facing high liquidity pressure may continue to delay debt and request restructuring. While various positive news and government policies have stimulated the market, and many internal real estate stocks have performed well this year, it is crucial to be aware of the potential risks and challenges of the market before making any investment decisions.