According to analysis by Oxford Economics, the cash flow of Chinese property developers has shrunk significantly this year. As of July, it was down 24% year-on-year. Since cash flow is an important metric to gauge a company’s ability to operate, this shows a risk of a difficult landing in the Chinese housing market.
According to CNBC, Tommy Wu, chief economist at Oxford Economics, pointed out that the total cash flow of Chinese property developers, after a decade of growth, has plummeted this year.
As of July, the annual cash flow of Chinese investors was 15.22 trillion yuan (about $2.27 trillion), compared with 20.11 trillion yuan in 2021, showing that investors’ cash flow is falling to the lowest level.
About two years ago, the Chinese market stepped up its real estate stimulus. Although the balance sheet appears to be increasing, since the end of last year, giant real estate groups such as Evergrande and Shimao have defaulted on their debts.
Amid a lack of funds, many housing projects are difficult to complete, leading to an end to mortgage payments right across China. Desperate homebuyers have stopped making mortgage payments, and they say they will only be ready to pay when developers resume construction of unfinished buildings.
That has made investors increasingly cautious when buying houses, depriving real estate businesses of an important source of cash, which is the advance payment of investors.
The crux of the problem is that these property developers do not have enough cash to complete projects, whether it is due to debt repayments, sluggish home sales, or misappropriation of funds, said Tommy Wu, lead economist and Oxford Economics.
He called on the authorities to solve this problem and rebuild home buyers’ confidence, which will help support home sales and thereby improve the financial situation of project developers.
According to the report, in China, real estate accounts for the majority of household wealth, and analysts estimate that real estate and real estate-related industries account for more than a quarter of China’s GDP. China’s housing crisis has slowed overall economic growth this year.
Last week, Oxford Economics lowered its 2022 growth forecast for China to 3.2% from 4%, reflecting dismal growth in the second quarter and a lack of new stimulus measures.
More than $2 billion of China’s high-yield real estate bonds mature in September, more than double that of August, CNBC reported, citing analysis by Morgan Stanley.
In a separate report on August 15, the U.S. investment bank cited a consumer survey that said about a quarter of Chinese homebuyers were more likely to stop making mortgage payments if construction was suspended.
To support economic growth, the Central Bank of China (People’s Bank of China) announced interest rate cuts on some one-year interest rates for institutions, known as the medium-term loans.
Bruce Pang, chief economist and head of research at Jones Lang Lasalle, said that while the People’s Bank hoped the rate cut would ease the burden on some homebuyers and help real estate projects’ owners get loans, the problem is not limited to capital.
Pang stressed that project developers are finding it harder to secure capital and have to rely more on pre-selling to homebuyers, but homebuyers are becoming more cautious amid the pandemic and are unsatisfied with the investment outlook.
Of the three main sources of funding for Chinese property developers, buyer down payment has fallen the most this year, down 34%, according to Wu.
Annual figures show that credit as a source of funding fell 22%, while self-funded capital, which includes stocks and bonds, fell 17%.
In the absence of strong stimulus from Chinese authorities, some investors have begun to shift their capital to companies in other parts of Asia.
“We have withdrawn almost all of our stake in the Chinese property market,” said Xin Yan Low, investment director for Asian real estate securities at Janus Henderson Investors.
Morningstar research analyst Patrick Ge said in a report this month that some funds have moved from Chinese real estate to other high-yielding Asian sectors such as renewable energy companies of India and Indonesian real estate.
Overall, the amount invested in Chinese real estate funds fell 59% in six months, the report said.