Chinese property market facing first downturn in three years

Chinese property market facing first downturn in three years

Chinese property investors are looking overseas as the government restricts funding and the market enters its first downturn since 2014

Summary

  • China’s property market has entered its first economic downturn in three years, with experts predicting a year of single digit price decline
  • Beijing is restricting funding for property developers, in an effort to cool the property market
  • As a result, many Chinese investors are now looking to overseas property markets, in particular the UK

 

As numerous funding sources favoured by property companies come under threat, Chinese real estate developers are facing a financial squeeze.

In addition, after a year of 4% house price growth, the Chinese property market has now entered its first downturn since 2014, leading Andrew Collier, Managing Director of Orient Capital Research to comment: “China’s more heavily indebted developers are living on a knife’s edge.”

Ordering regulators to limit equity and bond sales by developers, in October 2016 Beijing began restricting funding, in an effort to rein in the property market. In addition, authorities also clamped down on the inclusion of property loans in wealth management products (WMP), which had become a key source of capital for developers.

Cindy Huang, credit analyst at S&P Global Ratings, commented: “We believe the funding restriction will weaken Chinese property developers’ access to alternative financing and increase their cash flow burden.”

As transaction volume declines experts at S&P global ratings predict a year of single-digit price decline and up to a 10% fall in sales revenue for bigger developers.

While property remains a favoured asset among Chinese investors, many are now realising China is not the ideal market at this present time. As a result, many investors are looking to overseas markets.

The UK in particular has seen a dramatic increase in Chinese investor interest, following Britain’s decision to leave the EU last June, which saw sterling plummet to its lowest level in 31 years, rendering UK property considerably less expensive to overseas investors.

Named the city with the highest yields in Britain, Manchester in particular is seeing a substantial interest from overseas investors. With a booming rental population, the rise of the Northern Powerhouse and both home and land prices considerably lower than London, Manchester offers great investment potential for well capitalised developers, and 2017 is expected so see increasing numbers of investors acquire property in the City.

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