The Chinese real estate market has largely recovered from the corona-related decline in March. Sales will increase again in 2021. Real estate developers offer very promising prospects for investors.
The January outbreak of the coronavirus pandemic in China had a severe impact on the Chinese real estate market, compared to 2019, property sales in February 2020 dropped by 65 percent. The market has now almost recovered from this. This is due to both the special features of the Chinese market and government intervention.
China took immediate action to contain the pandemic. In some cases, entire cities were locked down. The result: China was the first country to revive its economy. "Today, the pandemic is under control in China - even after the coronavirus outbreak in Beijing in mid-June. The Middle Kingdom is now taking advantage of this head start," says Dimitrios Nteventzis, Fund Manager from the Emerging Markets/ Corporate Debt team at MainFirst Asset Management. "While other countries are only slowly emerging from lockdown and returning to a new normality, the Chinese economy is already booming again.” Chinese real estate sales have been on the rise since March and April and are now already back to 80 percent of the previous year's level. "The sales reported by the most important Chinese property developers suggest that the recovery is continuing," predicts Nteventzis.
Urbanisation fuels the real estate market
The bond market for property developers in China has a high level of local participation and loyalty. This investor ecosystem supports prices in times when foreign investors are fleeing and makes the Chinese real estate sector more resilient to downturns than other countries. This is illustrated by a comparison of the global corporate bond market with the Chinese market: since the beginning of the year, the former has experienced losses of 6 percent, while the Chinese market has completely recovered.
The real estate segment is a key sector for the Chinese economy, with sales accounting for around 18 percent of China's gross domestic product in 2019. The background to this is the rural exodus - in 2018, around 60 percent of Chinese citizens were living in cities, but the UN estimates that this figure will rise to 80 percent by 2030. This means that another 120 million people will move from the countryside to the city. "Due to the coronavirus, the real estate market will not grow in 2020, but the long-term economic trends are encouraging. The real estate market is expected to return to 2019 growth levels – 6 to 7 percent – as early as 2021," says Fund Manager Nteventzis.
Property developers are investment pearls
When you add in its suppliers, the importance of the sector is even greater, which is why the government is trying to control the pace of growth with interventions. This is being done, for example, by facilitating access to credit for domestic companies, labour market policy measures, and the reduction of mortgage interest rates by 20 basis points to stimulate demand for real estate. "One thing that we shouldn't forget in the context of all this progress is that one of the main goals of the Chinese Communist Party is to alleviate poverty. The real estate industry plays an important role in developing the economically weaker provinces and is a growth engine," says emerging markets expert Nteventzis.
"Against this backdrop, the major Chinese property developers are interesting for investors. Thanks to the rapidly growing real estate sector, their number has increased dramatically in recent years. Many property developers today have better balance sheets than a few years ago and also have cash reserves," explains Nteventzis. One of the pearls among these companies is the nationally active Country Garden. It has a well-diversified portfolio and direct and easy access to financing. Nteventzis points to Logan and Zhenro as promising smaller developers. They are primarily active in the booming Greater Bay Area, which includes the megacities of Shenzhen and Guangzhou. "The property developers are profiting from the economic recovery and the post-Corona backlog demand and therefore represent interesting investment opportunities."
Talking with: Dimitrios Nteventzis, Portfolio Manager from the MainFirst Emerging Markets Corporate Bond Fund Balanced & MainFirst Emerging Markets Credit Opportunities Fund Team.
