Slow implementation is hampering China’s 300 billion yuan (US$42 billion) plan to have local governments buy up unsold flats to help troubled developers, blunting the effect of a programme that was already seen as too limited to improve the fortunes of the country’s troubled property sector, according to analysts.
While a growing number of Chinese cities have said they will support the plan following Beijing’s announcement of the relending facility in May, precious little progress has been made, with only about five cities actually making purchases so far, according to a China Real Estate Information Corporation (CRIC) report on Monday.
“The impact relies on implementation and execution, but so far the policy-implementation is very slow, as we learned from talks with some top Chinese developers,” said Dong Jizhou, an analyst with Japanese investment bank Nomura.
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“The disappointing progress compounded by lacklustre economic data sets has dragged homebuyers’ sentiment a lot. More bolder measures are needed amid a deteriorating economic environment, if you want to have the effect you expected.”
About 30 Chinese cities have announced details of the scheme and requirements for purchasing unsold flats, according to CRIC data.
China’s technology hub Shenzhen joined the list of participating cities earlier this month, becoming the first of mainland China’s four tier-one cities to do so. Five more major cities – Nanjing, Hangzhou, Tianjin, Chengdu, and Qingdao – are mulling policies or details for purchases, state-owned newspaper Securities Times reported on Friday.
Cities taking part may face challenges around criteria for what units to buy, including size, ownership and price range, according to CRIC’s report.
For example, around 20 of the 30 Chinese cities that announced their participation set an upper limit of 120 square metres for the units they would purchase. If the flats are to become rental units, an upper limit of 70 square metres is usually required. Units fitting such criteria may be hard to find, according to CRIC.
In any case, the 300 billion yuan relending facility is expected to buy around 71.6 million square meters of homes, which works out to only 18.7 per cent of the inventory of unsold flats as of the end of June, according to an analysis by China Index Academy.
A S&P analysis showed that the national housing inventory fell by 1.2 per cent to 739 million square metres as of the end of July from a peak at the end of March. The analysis concluded that around 1.7 trillion yuan would be needed to reduce unsold inventory to a healthier level of 500 million square meters.
Local governments had already borrowed all but 12.1 billion yuan of the 300 billion yuan fund as of the end of June, according to official data.
The yield of the flats in question versus the funding cost cities must incur is a major concern, observers said.
The average rental yield across 50 Chinese cities, tracked by China Index Academy, is 2.1 per cent, but the funding cost cities end up paying under the relending facility is around 3 per cent, not to mention costs for renovation and operation.
Meanwhile, the market continues to struggle. Home transactions rebounded in June after the policy was announced, before backtracking in July. Sales value generated by the top 100 Chinese developers dropped to 279 billion yuan in July, down 36.4 per cent compared with June and 19.7 per cent compared with a year earlier, according to CRIC.
Investors await bolder measures to prop up the sector. Authorities are reportedly considering allowing local governments to issue special bonds to buy up unsold homes, which could have mildly positive effects, according to analysts.
“This is more favourable than the relending facilities,” considering the latter’s shorter duration and higher funding cost, according to UBS analyst John Lam.
However, the funding cost of such special bonds, standing at 2.46 per cent, is slightly higher than the estimated average gross residential yield of 2.3 per cent across 50 Chinese cities, he added.
“It is not difficult for local governments to issue bonds, but they need to secure buyers first,” said Jeff Zhang, an analyst with Morningstar. “That said, the amount will likely be limited as the bond issuance quota by local governments is still capped, and financial institutions may hesitate lending to government entities given their high gearing ratios.”
More from South China Morning Post:
- Shenzhen joins Chinese local governments taking unsold homes off developers’ hands
- China property: Beijing launches US$41 billion of funds to buy unsold homes, repurchase of ‘idle’ land in drive to rescue housing market
- Beike’s second-quarter profit jumps 13.9% in surprise defiance of China’s property slump
- No earnings reprieve for Chinese developers with home sales, prices in doldrums
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