The Onset of the De-Real Estate Era
The era of de-real-estate is approaching. On March 9th, during a press conference, the Minister of Housing and Urban-Rural Development made a decisive statement. For real estate enterprises that are severely insolvent and have lost operational capabilities, he declared that those which need to go bankrupt will go bankrupt, and those that can be restructured will be restructured, following the principles of legality and market operation. Any actions that harm the public interest will be resolutely investigated and punished according to the law. This statement, undoubtedly, was like a thunderclap on a clear day, sparking widespread approval on social media, while real estate companies probably have even more worries now.
Challenges in the Current Real Estate Market
The biggest problem facing real estate companies right now is succinctly summed up in one word: capital. Recently, prominent names like Gemdale and Vanke have made headlines. On March 5th, Gemdale Group mortgaged one of its core assets, the Beijing Gemdale Center, to the Shenzhen branch of China Communications Bank for a loan of 4 billion yuan. Just ten days earlier, Gemdale’s property management in Shenzhen had applied for a 2.5 billion yuan loan from the Shenzhen branch of China Merchants Bank. According to China Real Estate News, Gemdale Group has already disclosed six bank financing deals this year, totalling more than 8 billion yuan.
As for the state-owned enterprise Vanke, although it is controlled by or has shares in at least 40 A-share listed companies, its current situation is not easy either. Notably, Vanke has just redeemed $630 million in medium-term notes. However, Vanke faces three maturing foreign debts this year. Besides the recently paid $630 million, there are two more debts due this year. One is a $600 million bond issued in 2019 with a coupon rate of 4.2%, maturing on June 7, 2024. The other is a renminbi-denominated bond issued in 2021, amounting to 1.445 billion yuan with a coupon rate of 4.35%, maturing on May 25, 2024. In total, Vanke needs to repay over 5.5 billion yuan in notes this year. However, according to China Real Estate News, sources from Vanke have indicated that financing channels are fluid, suggesting there is no need for excessive concern.
De-Real Estate and Economic Resilience
The current situation is that many real estate companies are resorting to mortgaging and selling off their assets as a form of self-rescue. Gemdale has mortgaged its core assets in Beijing, and Longfor was able to redeem its debts early by mortgaging its operational properties. With no other options and changing market expectations, the profitability of real estate firms is in a critical state. According to statistics from Wind Financial Terminal, as of March 5th, 67 real estate companies listed on both A-share and H-share markets have issued profit warnings, with 40 of them anticipating losses. This represents about 60% of the firms. The Minister of Housing and Urban-Rural Development’s call for bankruptcy and restructuring where necessary undoubtedly has left many real estate companies restless.
From a broader perspective, the era of de-real estate is indeed approaching. Looking at the major global economies over the past 30 years, each has experienced a phase of moving away from real estate-driven growth. If we follow the timeline, Japan was in this phase from 1980 to 1985, South Korea from 1985 to 1990, and the United States from 1990 to 2005. Subsequently, they entered an era characterized by a notable decline in the proportion of residential investment in GDP. South Korea saw a decrease of 7.4 percentage points, Japan by 4.5 percentage points, and the United States by 4.1 percentage points. According to Shenwan Hongyuan, China has seen a decline of 4.9 percentage points in the ratio of residential investment to GDP from 2021 to 2023, a reduction that is higher than that of the U.S. and Japan.
Predicting the duration of China’s real estate cycle downturn is challenging, but by observing the durations in other major economies, it varies widely. The U.S. saw a decline for about six years before stabilizing, while South Korea and Japan experienced downturns lasting over 20 years before they began to stabilize. In contrast, China has already seen a decline of 4.9 percentage points in just three years. Looking at how other major economies have achieved growth during their respective de-real estate phases reveals a common short-term trend: government consumption driving GDP growth. In the initial stages of reduced real estate share, countries like the United States and Australia used government spending to stabilize their economies. However, after three to five years, the proportion of government consumption in GDP generally fell back. Japan’s situation was different; after the real estate bubble, it went through a “lost decade” and later adopted fiscal expansion policies.
Adapting to Economic Changes: Policy and Market Dynamics
Considering the recent large-scale equipment upgrades, market logic suggests that with low capacity utilization, using equipment updates to drive productivity increases could lead to a situation where supply exceeds demand. Thus, conventional understanding does not apply. Entering the post-real estate era, as observed in countries like the U.S. and Japan, government consumption has been utilized. To put it plainly, expanding capacity is used to address overcapacity. Some might question how the funding for equipment updates is sourced.
At the Central Financial and Economic Affairs Commission meeting, it was acknowledged that the market plays a primary role while the government provides guidance. Guangfa Macroeconomics anticipates funding from three areas: Firstly, fiscal policy, including loans, fiscal subsidies, tax incentives such as income and value-added taxes, expanding the scope of government green procurement, and promoting green purchasing among state-owned enterprises. Secondly, monetary and financial policies, such as banks offering special re-loans—a practice with precedents—and supporting companies in issuing green bonds, along with financing in primary and secondary markets. Thirdly, administrative measures, including the establishment and improvement of product and equipment efficiency standards and retirement criteria. This is relatively straightforward, involving setting scrappage standards, such as adjusting the service life after which equipment must be retired, which could be moved up slightly without issue. Of course, in the current climate of weak confidence among businesses and consumers and sluggish consumption, the response seems subdued. However, there are indeed opportunities, such as outdated equipment in many state-owned enterprises and the secondary market under massive equipment upgrades, which are likely to have potential.
However, the main discussion of this article is that the Chinese government intends to change the past model of using housing to drive economic growth, aiming to enter an era of de-real estate. This shift will lead to large-scale equipment updates. Currently, the Hong Kong property market is booming, and the cities of Beijing, Shanghai, Guangzhou, and Shenzhen are also showing good performance after a mild recovery. Whether this signals the arrival of a real estate spring is questionable, but those who can afford to buy properties in Hong Kong are likely to be quite wealthy. The properties in Beijing, Shanghai, Guangzhou, and Shenzhen are generally superior to those in other areas. A closer look reveals the sequence of events: first, Hong Kong completely lifted property market restrictions, leading to a booming market there, followed by some improvements in Beijing, Shanghai, Guangzhou, and Shenzhen. This is akin to a seesaw effect—if one side is knocked higher, the other falls harder. The shift towards de-real estate is an inevitable part of economic growth.
