KKR says China’s real estate correction may only be halfway done

High-rise buildings are illuminated at night in the west coast new area of ​​Qingdao, east China’s Shandong province, March 22, 2024.

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BEIJING — China’s real estate problems are likely far from over and the industry’s problems must be resolved quickly if overall GDP growth is to accelerate significantly, according to a report released Thursday by global investment firm KKR.

That’s one of two key takeaways from a recent trip to China by the firm’s head of global and macro asset allocation, Henry H. McVey. It was his fourth visit in just over a year.

“A fundamentally overbuilt real estate sector needs to be addressed – and quickly,” he said in the report, which co-authored Changchun Hua, KKR’s chief economist for Greater China.

“Second, confidence must be restored to drive back savings,” McVey said, noting that this would incentivize consumers and businesses to spend to upgrade to higher quality products, as advocated by Chinese authorities.

Real estate and related sectors once accounted for about a fifth or more of China’s economy, depending on the scale of analysts’ calculations. The real estate sector has collapsed in recent years after Beijing cracked down on developers who rely heavily on debt for growth.

Based on comparisons with real estate corrections in the United States, Japan and Spain, “the Chinese real estate market correction may be only half complete” in terms of magnitude, according to the KKR report.

“Price and volume must be put under pressure to complete the cleaning cycle,” the report said. “So far, however, it has largely been a contraction in volume.”

Although KKR’s report does not provide many details on specific real estate policy expectations, the authors believe that more actions by Beijing to improve China’s real estate sector “could materially change investor perceptions.” .

Amid geopolitical tensions, the collapse of the country’s real estate market and falling stocks have prompted many foreign institutional investors to reconsider investments in China.

“According to some of our proprietary investigative work, many investors have considered reducing their exposure to China to 5-6%, from 10-12% today, at a time when we believe the fundamentals of economy are likely at an all-time low,” the KKR report said.

Much of China’s official data from earlier this year beat analysts’ expectations.

Chinese officials have said the real estate sector remains in a period of adjustment, while Beijing is now emphasizing the manufacturing sector and what it considers “high-quality development.”

Authorities have also issued policies to promote financial support for some property developers, while many local governments – but not necessarily the biggest cities – have significantly eased restrictions on home purchases.

The real estate slowdown remains moderate

KKR expects Chinese GDP growth to slow slightly to 4.7% this year and 4.5% next year, with real estate and Covid-related factors halving their drag on the economy , going from 1.4 percentage points in 2024 to 0.7 percentage points in 2025.

“Our conclusion is this: with the (real estate) correction underway as well as possible additional policy support, we believe that the drag on (the) overall economy should ease somewhat over the coming years,” he said. McVey said in a separate statement. . He is also the chief investment officer of KKR Balance Sheet.

Catering, accommodation and wholesale trade are expected to slightly increase their contribution to growth over the next two years, while digitalization and the transition to a more carbon-neutral green industry are expected to remain the main growth drivers, according to The report.

For investors, the report said a more important development than China’s rising GDP would be whether authorities could make it easier for businesses and households to access capital markets.

“Fixing weak spots in the economy, particularly around housing, will ultimately improve the cost of capital and also allow new consumer businesses to access capital markets, likely at better prices if real estate and confidence are doing better,” McVey said. in the declaration.

Beijing announced in March a GDP target of around 5% for this year. Housing and Urban and Rural Development Minister Ni Hong said last month that developers should go bankrupt if necessary and that authorities would encourage the development of affordable housing.

Recent data points to some stabilization of the slowdown in the real estate sector. The seven-day rolling average of new home sales in 21 major cities fell 34.5% year-over-year on Monday, better than the 45.3% decline recorded a week earlier, according to Nomura, citing Wind Information.

Compared to the same period in 2019, that sales average was down just 27.8% on Monday, compared to a 47% drop a week earlier, Nomura said, noting that most of the improvement was is produced in the largest cities in China.

Consumer Perspectives

KKR said the bulk of its local portfolio is consumer and services companies, whose businesses reflect how middle- and high-income Chinese spend modestly to improve their lifestyle.

“Revenue growth is solid, margins are holding up, and consumers are spending on less visible items such as “smart homes,” pets, and recreational activities,” the report said. “Domestic travel is also strong.”

Retail sales rose a better-than-expected 5.5% year-on-year in January and February, boosted by significant spending growth during the Lunar New Year holiday.

Longer term, KKR still expects that China may follow historical precedent in changing its policies to be “more investor-friendly.”

“While our message is not a clear signal to rely on,” the report said, “it serves as a reminder – using history as a guide – that if China adjusts its domestic policies to be more investor-friendly ( especially as it relates to supply-side reforms), this market could rebound significantly from current levels.


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