China property sector shows signs of deterioration

China’s $43tn property sector, the backbone of the economy, is showing signs of deterioration even as Beijing attempts to kick-start growth after the coronavirus outbreak.

Beijing wants to revive economic growth following one of its worst periods since the Cultural Revolution, which ended in the 1970s. Mass quarantines and the restricted movement for hundreds of millions of people have caused important economic indicators such as industrial output and retail sales to contract at record rates this year.

Now that the number of new cases of coronavirus has fallen in China, officials in many parts of the country are pushing for factories, homebuilders and other businesses to get back to work as quickly as possible. Authorities announced they would begin relaxing restrictions on travel to and from Hubei, the central Chinese province where the outbreak started in January, from Wednesday.

Despite the efforts by Beijing, the property market, which some analysts estimate accounts for about 25 per cent of the country’s gross domestic product, has not returned to normal in March — and may even be getting worse.

China’s Beige Book property index showed a deepening in the contraction of sales volumes between February and March, contradicting the notion that China’s economy is returning to normal, as some official data indicate. The index is compiled through interviews with more than 3,300 companies and executives, with results that often clash with government data.

“Real estate was devastated in Q1,” the Beige Book report said. “Every core performance metric plunged deep into negative territory across both realty and construction.”

The index for property sales volume contracted 11 points to -49 in March from -38 in February. A negative reading on the index indicates contraction and a positive reading indicates an expansion of sales volume. The index includes sales of homes and commercial property.

For the first quarter of 2020, the sales volume index showed a reading of -29, compared with an expansionary reading of 70 in the first quarter of 2019.

Data compiled by Barclays showed that home sales fell about 40 per cent in March compared with the same period last year. The steep plunge indicates that the sector is starting to recover after sales fell 70 per cent in February.

“In China the new-build market is so important to volumes,” said Liam Bailey, head of research at Knight Frank in London. “Any distress in the housebuilding sector will have an impact in the medium term on delivery and therefore transactions.”

Turbulence in China’s property sector could result in defaults among some midsized developers and was expected to have a severe knock-on effect on GDP growth this year.

Based on a calculation by Capital Economics, gross domestic product in the first three months of this year will contract by about 20 per cent quarter on quarter. Barclays has lowered its estimate for 2020 GDP growth to 1.3 per cent, compared with a projected 5.8 per cent before the outbreak.

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