China’s housing market is likely to continue to cool in 2018, with sales growth set to slow across most of the country and house prices likely to stay relatively flat, says Fitch Ratings.
However, the authorities have considerable policy flexibility to support housing demand, which limits the risk of a market downturn. We therefore maintain a stable sector outlook for Chinese homebuilders.
The Chinese government has imposed tougher rules on home purchases and minimum loan deposits in higher-tier cities since October 2016 to dampen speculation. We do not expect further tightening in 2018, except perhaps in some lower-tier cities in strong economic regions that could see price increases. Most of the existing restrictions are likely to remain in place, but policies could be adjusted to encourage homeownership for first-time homebuyers or to attract skilled labour migration in some cities where house prices have stabilised.
The curbs have had a clear impact on the market, reining in house price inflation, tempering home sales growth and encouraging destocking. We expect them to limit any gains in house prices in 2018. Contracted sales growth is likely to slow for most homebuilders, and we forecast that overall housing sales will decelerate to 5%, from 10.9% yoy on a trailing 12-months contracted sales at end-October 2017. The destocking cycle could, however, begin to reverse, as some companies now only have land bank reserves for two to three years of development.
A major house price correction is unlikely, given that the authorities directly control many aspects of the housing and mortgage markets. Moreover, the restrictions in higher-tier cities, which have seen the strongest price gains in recent years, have led to considerable pent-up demand that could be released if policy is relaxed.
Homebuilders’ EBITDA margins could begin to narrow in 2018 and 2019 as homebuilders start to work through their higher-cost inventory in a market where prices are under pressure from government controls. Leverage is likely to remain relatively stable over the next two years, with net debt/adjusted inventory averaging 40%-43% among Fitch-rated homebuilders. Cash flow generation is also likely to remain strong.
We maintain a stable sector outlook on commercial property. Mall traffic in higher-tier cities is suffering from strong saturation and competition from e-commerce, with only mature malls in prime locations performing well. We believe these first-tier city malls will achieve low single-digit yoy rental growth in 2018, similar to 2017. However, malls of established operators in less-saturated lower-tier cities are seeing strong traffic growth.
Grade A office space in most first-tier cities is likely to remain broadly stable, and we expect the vacancy rate to stay below 15%. However, office assets in Guangzhou and Shenzen, as well as in lower-tier cities, have higher vacancy rates and could be affected by an increase in supply in 2018.
