Chinese property developer shares have surged over the past week, largely driven by the Chinese Government's heavy-handed measures to revive the economy and market, together with policy stimulus in the Chinese property market. The Politburo of the Chinese Communist Party was held on 26 September, chaired by President Xi Jinping. According to the policy directives outlined (see Table 1), the content was more comprehensive than in late July, including explicitly calling for “halting falls and stabilizing” the property market, providing larger scale loans to developers and a need to relax residential purchase restrictions. We believe this signals that the previous primary principle of "houses are for living in, not for speculation" already evolves, with the policy pivoting to offer fuller support aimed at property market recovery.
Table 1: Main Contents of The Politburo of the Chinese Communist Party
Main Contents | |
26 September 2024 | · To stabilize the decline in China's real estate market, key points included the need to strictly control the increment of construction of commercial housing, optimize the existing housing stock, improve the quality, increase loan support for "white list" projects and revitalize idle land. · It also stressed the need to respond to people's concerns, adjust the housing purchase restriction policy, reduce the interest rate of existing mortgage loans, and promptly improve land, fiscal, tax and financial policies to promote a new model of real estate development. · To help businesses overcome challenges, further regulation of enforcement and supervision related to enterprises should be standardized. Law to promote the development of the private economy should be introduced to create a favorable environment for the growth of the non-public sector. |
30 July 2024 | · Continued efforts are needed to mitigate risks in key areas, and newly introduced policies should be effectively implemented to promote the stable and healthy development of the real estate market. The approach should combine the absorption of existing inventory with the optimization of new supply. Active support should be provided for the acquisition of unsold commercial properties to be used as affordable housing, and further efforts should be made to ensure the timely delivery of housing projects. The development of a new model for the real estate sector should be accelerated. · Local governments is necessary to improve and implement local comprehensive debt plans, create conditions to speed up the resolution of local financing platform debt risks. It is necessary to coordinate risk prevention, strengthen supervision, promote development, boost investor confidence, and enhance the inherent stability of the capital market. |
Data as of 26 September 2024 Source: Xinhua News Agency, Global Times | |
In the lead up to and aftermath of the meeting, a slew of property-related policies were gradually introduced (see Table 2 and Table 3). We believe these are another round of the supportive policy stimulus following the “517” measures (Related Article: Heavyweight Policies Are Approaching! Is the CRE Recession Coming to an End?). On the other hand, recently, there were unveiled numerous initiatives to support the domestic consumption, investment, and capital markets. Coupled with remarkably positive sentiment across Chinese A shares and Hong Kong equity markets, these favourable developments resulted in a strong surge in Chinese property developer share prices.
Table 2: Marco Policies Related to Chinese Property Market
Main Policy | Details |
Reserve Requirement Ratio Cut | The Reserve Requirement Ratio (RRR) was lowered by 0.5 percentage points, injecting RMB 1 trillion of long-term liquidity into the financial market. There is a possibility of another cut by 0.25 to 0.5 percentage points by the end of the year |
Lowering Central Bank Policy Rates | The 7-day reverse repo rate was reduced by 0.2 percentage points, from 1.7% to 1.5% |
Lowering Rates on Existing Home Loans | Mortgage rates on existing home loans have been lowered, along with unified minimum down payment ratios. Commercial banks are expected to reduce existing mortgage rates to align with new mortgage rates, with an estimated average reduction of around 0.5 percentage points. |
Lowering Down Payment Ratios | The minimum down payment ratios for first and second homes have been lowered. Nationwide, the minimum down payment ratio for second-home loans has been reduced from 25% to a minimum of 15% |
MLF and LPR Adjustments | The Medium-term Lending Facility (MLF) is expected to decrease by 0.3 percentage points, while the Loan Prime Rate (LPR) and deposit rates are expected to drop by 0.2 to 0.25 percentage points |
Support for Real Estate Enterprises | Policy banks and commercial banks are exploring the possibility of supporting qualified enterprises in market-based acquisitions of real estate assets |
Sources: CMBI Research, Different Internet Resources, iFAST Compilations Data as of 3 October 2024 | |
Table 3: First-tier Cities’ Latest Policies about Home Purchases, Mortgages and Tax
City | Policy | Details |
Shanghai | Purchase restriction | Shorten the required years of paying social security or individual income tax for non-Shanghai residents to purchase home in the outer ring area from 3 years to 1 year |
Qualified non-Shanghai families who have paid social security or individual income tax more than 3 years can purchase home as Shanghai families | ||
Qualified buyers can buy one more home in Lingang new district based on current purchase restrictions | ||
Mortgage loan | Lower the mortgage rate of existing home loans | |
Lower minimum down payment ratios for first/second home buyers to 15%/25% | ||
Tax policy | Lower the Value-Added Tax (VAT) exemption period for individual to sell home to 5 years to 2 years | |
Cancel standards of ordinary and non-ordinary home to lower transaction cost | ||
Guangzhou | Purchase restriction | Cancel all purchase restrictions for Guangzhou residents and non-Guangzhou families |
Shortening the required years of paying social security or individual income tax for non-Guangzhou residents to purchase home the from 2 years to 6 months | ||
Allowing buyers with 2 and more than 2 homes to apply commercial mortgage loan for purchasing home in non-restricted area | ||
Mortgage loan | Lower the minimum down payment ratios for first-home buyers from 30% to 15% and for second-home buyers from 40% to 25% | |
Removing lower limit of mortgage rates for first/second home buyers | ||
Shorten the required time for Guangzhou residents and non-Guangzhou residents to pay into the provident fund for applying for provident fund loans from 1 year and 2 years, respectively, to 6 months | ||
Shenzhen | Purchase restriction | Allow Shenzhen families/residents to buy two homes (for families) or one home (for individuals), with the option to purchase an additional home in designated districts |
Allow qualified non-Shenzhen families/residents to buy homes in designated districts | ||
Cancel transaction restrictions on commercial housing and apartments | ||
Mortgage loan | Lower the minimum down payment ratios for first-home buyers to 15% and for second-home buyers to 20% | |
Tax policy | Lower the Value-Added Tax (VAT) exemption period for individuals selling homes from 5 years to 2 years | |
Others | Allow developers to set prices for residential housing and apartments independently | |
Beijing | Purchase restriction | The required years of paying social security or income tax for non-Beijing residents to purchase homes will be shortened 2 years or more |
Mortgage loan | Interest rates on existing mortgage loans will be lowered, with commercial banks guided to reduce these rates to align with the rates for newly issued loans | |
The minimum down payment ratio for first-home loans will be reduced to 15%, and 20% for second-home loans | ||
Beijing families with two or more children are eligible for an additional RMB 400,000 in housing provident fund loan limits | ||
Tax policy | The required years of paying social security or income tax will be reduced to 1 year or more for qualified talents and professionals | |
Cancel standards of ordinary and non-ordinary home | ||
Sources: CMBI Research, Different Internet Resources, iFAST Compilations Data as of 3 October 2024 | ||
The relatively more important policies announced are lowering mortgage rates, reducing down-payment ratios, supporting bank acquisitions of developers' assets and easing purchase restrictions in first-tier cities. These measures are likely to stimulate housing demand and alleviate imbalances between supply and demand.
Therefore, we believe the series of policy supports have potential to boost the property sales performance in the short-term. For example, after the “517” measures, the monthly property contracted sales of top 100 developers in June rebounded 36% MoM, while for months afterward, the contracted sales dropped back to the previous level (see Chart 1). The impact of the policies bears close monitoring. At this stage, it remains premature to conclude whether these policies can ultimately reverse the sales performances and property market fundamentals.
Chart 1: Monthly Property Contracted Sales of Top 100 Developers
Nevertheless, the rally in the property developers shares recently could translate to practical implications for developers. For those non-default developers which are facing certain liquidity pressures (see Table 4), their rooms and opportunities for rights issues or share placements are expanded substantially (taking reference from the share placements wave in late 2022 and early 2023). Their equity financing abilities could improve, then reducing the possibilities of short-term defaults for such developers.
We could evaluate the effectiveness of rights issues or share placements by referencing the short-term debt to market cap ratio. The lower this ratio, the higher effectiveness of having rights issues or share placements to relieve the near-term liquidity pressures.
Table 4: Some Non-default Developers which are facing certain Liquidity Pressures
Developer | Market Cap (HKD billon) | Short-term Debt^ (RMB billion) | Short-term Debt / Market Cap (%) | Related Bond |
Vanke | 128.4 | 105.5 | 91% | |
Longfor | 113.3 | 30.9 | 30% | |
Seazen | 20.5 | 19.7 | 106% | |
Greentown | 25.2 | 35.4 | 155% | |
Jinmao | 18.1 | 19.6 | 119% | |
Shui On | 6.7 | 11.9 | 198% | |
Roadking | 1.2 | 7.9 | 742% | |
Yanlord | 8.3 | 6.0 | 80% | |
Sources: Bloomberg Finance L.P., iFAST compilations Data as of 3 October 2024 ^Data as of 30 June 2024 | ||||
For defaulted developers, the rally in their share prices could enhance estimated recovery values of bonds given most of their offshore debt restructurings involve debt-to-equity swaps. Currently, the implied views from the bond market and equity market have large divergence (see Table 5). The expected post- debt-to-equity swaps recovery rates notably exceed USD bond prices in most cases. Upon completing the offshore debt restructurings, certain offshore debt principals would be converted into new shares (through convertible bonds or new shares directly issued by the developers after the restructuring being effective). Hence, if their share prices remain resilient, the value of these bonds (fully or partially depending on different developers’ plans) would converge towards stock price levels eventually.
Table 5: Analysis of Debt-to-Equity Swaps
Developer | Conversion Price Under Restructuring* (HKD) | Stock Price (HKD) | Debt into Equity Swap Recovery (%)** (Conversion Price / Stock Price) | Bond Price |
Sino-Ocean | $5.52 (Class B Creditors) | $0.49 | 8.8% | $7.5 – $8.5 |
Shimao | $6.00 | $1.99 | 33.2% | $5.5 – $6.5 |
Kaisa | $4.75 (Tranche A to C) | $0.47 | 9.9% | $4.25 – $5.75 |
$4.05 (Tranche D to H) | $0.46 | 11.6% | ||
Aoyuan | $1.06 | $0.62 | 58.5% | / |
Sunac | $6.00 (Mandatory Convertible Bonds) | $3.36 | 56.0% | / |
Yuzhou | $3.76^ | $0.26 | 6.8% | $6.5 - $7.5 |
Logan | $3.00 (Option 3) | $1.18 | 39.3% | $9 - $10 |
Powerlong | $3.35 | $0.84 | 25.1% | $8 - $9 |
CIFI | $1.6 | $0.61 | 38.1% | $10.5 - $12 |
Fantasia | $1.35^ | $0.20 | 14.8% | $2.25 - $3.75 |
*Subject to the restructuring clauses **Assume creditors could convert the principals into shares immediately and sell the shares at the current market price ^Estimated number, for reference only Sources: Company’s Announcements, Bloomberg Finance L.P., iFAST compilations Data as of 3 October 2024 | ||||
In addition, the recent rally should push or accelerate the offshore creditors to support the debt restructuring plans as the creditors generally hope to seek early conversion to get the new shares in order to sell the shares in the secondary market and receive higher claims from recovery. Thus, it is likely that more developers could accomplish the offshore debt restructurings in a timelier manner.
However, investors also need to note that some of the restructuring plans involve the cap limit in their debt into equity swap parts. Even if the creditors choose the debt into equity swap option, they might not be able to fully convert all principal into equity. Besides, the convertible bonds issued through restructurings will only gradually convert into new shares over coming years and the new shares could bear lock-up periods where prices could retract meaningfully. There are still full of significant uncertainties. Still, with the expectation in higher recovery value from the shares, it still serves as a catalyst for accelerating the restructurings and for the defaulted Chinese property bonds to rebound.
