China’s real estate sector continues to face significant challenges that are likely to have a lasting impact on the country’s overall economic growth. A recent report by global investment firm KKR highlights the pressing need to address the problems within the industry promptly. According to Henry H. McVey, head of global and macro asset allocation at KKR, the real estate sector in China is fundamentally overbuilt and must be addressed swiftly to prevent further economic turmoil.
In addition to dealing with the overbuilt nature of the real estate industry, McVey emphasizes the critical need to restore confidence among consumers and businesses. He argues that confidence is essential in driving savings back down, which would, in turn, spur spending on higher-quality products. This shift in consumer behavior aligns with the Chinese authorities’ efforts to promote upgrading to more premium goods and services.
The property market correction in China has been ongoing for the past few years, following Beijing’s crackdown on developers’ excessive reliance on debt for growth. The KKR report suggests that the housing market correction in China may only be halfway complete in terms of its depth when compared to similar corrections in other countries like the U.S., Japan, and Spain. Both housing prices and volume are expected to come under pressure to complete the cleansing cycle, with the current phase largely characterized by a contraction in volume.
While the KKR report does not delve into specific expectations for real estate policy in China, it underscores the potential impact of Beijing taking more action to improve the sector. Such actions could significantly shift investor perception and alleviate concerns among foreign institutional investors. The report mentions that many allocators have considered reducing their China exposure due to geopolitical tensions, the property market slump, and a drop in stocks.
KKR expects a modest slowdown in China’s GDP growth, forecasting a growth rate of 4.7% for this year and 4.5% for the following year. The real estate sector and Covid-related factors are projected to have a reduced drag on the economy, with their impact halving from 1.4 percentage points in 2024 to a 0.7 percentage point drag in 2025. The report suggests that with the ongoing property correction and potential policy support, the negative impact on the overall economy should moderate in the coming years.
Despite challenges in the real estate sector, the report highlights other sectors poised for growth in China. Catering, accommodation, and wholesale industries are expected to make modest contributions to growth in the next two years. Additionally, digitalization and the shift towards more carbon-neutral, green industries are projected to remain significant drivers of growth.
The report emphasizes the importance of making it easier for businesses and households in China to tap into capital markets. Improving access to capital markets would ultimately reduce the cost of capital and enable new consumer companies to access funding at more favorable terms. McVey asserts that repairing soft spots in the economy, particularly in the housing sector, will have a positive impact on the cost of capital and boost consumer confidence.
Chinese authorities have released policies to provide financial support to select property developers and have relaxed home purchase restrictions in many local governments. Minister of Housing and Urban-Rural Development Ni Hong has stated that developers should be allowed to go bankrupt if necessary, signaling a more market-oriented approach. Despite the challenges, recent data indicate some stabilization in the property sector slowdown, with improvements observed in China’s largest cities.
The challenges facing China’s real estate sector have wider implications for the country’s overall economic growth. Addressing the issues within the industry, restoring consumer and investor confidence, and implementing supportive policies will be crucial in navigating through the current uncertainties. By focusing on driving sustainable growth in key sectors and improving access to capital markets, China can work towards stabilizing its economy and fostering long-term prosperity.