China Real Estate Stocks See Surge But It May Be Too Early To Celebrate, Analysts Say

Stocks of real estate developers rose this week as a result of reports that the central bank and banking regulator had taken action to encourage banks to support the real estate sector.

But despite a rise in the stocks of significant property developers this month, China's real estate market is not yet ready for a speedy comeback. This is so because, according to economists, Beijing's most recent support doesn't directly address the primary issue of declining property sales and prices.

Shares of Longfor have increased by about 90%, and those of Country Garden, the largest Chinese developer by sales, more than doubled in November. Some of the gains from this month have already been lost by the stocks. While this was happening, iron ore prices saw a 16% increase this month. According to Morgan Stanley analysts, property building accounts for 40% of China's steel demand.

As per Sheng Mingxing, a ferrous metals expert at Nanhua Research Institute, the market prices have departed from the fundamentals and the situation is one of "strong expectations, but weak reality," It's critical to monitor whether apartments can be finished and delivered during the busiest building months of March and April.

The new policies, which are unofficially announced but widely reported in China, call for treating all developers equally regardless of whether they are state-owned and specify loan extensions. They also support bond issuance.

"This really is a temporary relief in terms of the developers having to meet less debt repayment needs in the near future - a temporary liquidity relief rather than a fundamental turnaround," Hong Kong-based analyst Samuel Hui, director, of Asia-Pacific corporates, Fitch Ratings said.

Earlier this year, when building on apartments was delayed, many homebuyers refused to continue making their mortgage payments. The majority of homes in China are sold before they are finished, providing builders with a significant source of cash flow.

In the end, China's real estate sector is going through a state-directed restructuring, becoming a smaller portion of the economy and transitioning to a business model that relies less on the pre-sale of units. According to S&P's Lu, the size of the real estate market has decreased by about one-third since last year and is projected to stay the same in 2019. He noted that state-owned developers have benefited better throughout the slump.

Lu said sales by state-owned developers decreased by 25% in the first three quarters of the year, while sales by non-state-owned developers fell by 58%. Moreover, despite recent legislative changes, Beijing's attitude toward large-scale property purchases remains unwavering.