Transcript
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Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm your host, Harold van der Linde, Head of Asian Equity Strategy here at HSBC.
Speaker: Today, we're putting the spotlight on property in China.
Speaker: Have we seen the bottom of the market?
Speaker: And if so, how far can the recovery go?
Speaker: Joining me is our in-house expert, Head of Asia Real Estate Research, Michel Kwok.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: Let's start with a little context, as we like to do on this podcast.
Speaker: Across mainland China, sales of new homes have fallen by nearly 50% since the peak of 2021.
Speaker: That's a lot.
Speaker: But a policy pivot in September 2024 seems to have been a real turning point, as pivots are, I guess.
Speaker: Since then, new home sales in Tier 1 cities, so those are the biggest cities in China, have risen nearly 30% year-on-year and land sales are surging too.
Speaker: On that note, Michel Kwok, welcome to Under the Banyan Tree.
Speaker: Hi, Haro.
Speaker: Thanks for having me.
Speaker: Good.
Speaker: Michel, I know you're looking at stocks, but I just want to talk about the bricks and mortar.
Speaker: So that's houses, apartment shops, and these sort of things.
Speaker: I know last year you said people should be looking at property, and there was quite some pushback on that, I remember as well.
Speaker: But it seems like sentiment on property in China is shifting.
Speaker: Is that correct?
Speaker: Yes.
Speaker: Yeah, Harold.
Speaker: And recall that last year we talked about the China housing market inflection in 2025.
Speaker: I recall publishing a piece on this in May 2024, in fact.
Speaker: And we've had a lot of pushback.
Speaker: Nobody thought that China could ever recover in a way.
Speaker: Lots of inventories.
Speaker: Whole cities were supposedly completely kind of overbuilt and these sort of things, right?
Speaker: Exactly.
Speaker: So, you know, fast forward to today, right?
Speaker: You look at this market recovery.
Speaker: It's actually played out since October 2024.
Speaker: We have seen five consecutive months of home sales improvement in a new home market.
Speaker: And so if you were to compare our initial assumption of a recovery in 2025, that timeline is actually even happening earlier.
Speaker: So what happened in October 2024?
Speaker: What made that...
Speaker: that markets suddenly recover?
Speaker: So we had two rounds of very meaningful policy stimulus back in 2024.
Speaker: The first round in May, the second round in September, the last week of September to be exact.
Speaker: And so what we have seen is in October, a fairly swift recovery in housing sales.
Speaker: But what actually was surprising is that November sales momentum was better than October and December was better than November.
Speaker: It's picking up.
Speaker: Yeah, and up until this year, when you look at the earlier lunar Chinese New Year holiday period and the extended holiday period, you actually see sales momentum actually keeping up.
Speaker: So what that tells you is that everybody who wanted to maybe be a little bit skeptical about this recovery, the sustainability of it, it's all playing out in a way that is well above everyone's expectation.
Speaker: So we're in a sort of a long-term cycle that seems to be moving in a different direction.
Speaker: As I mentioned earlier on, since 2021, these sales have fallen a lot.
Speaker: That now seems to shift.
Speaker: But also, I think here, right, it's important to think about the narrative.
Speaker: a few years ago, everyone talked about the lost decade.
Speaker: We did too.
Speaker: But actually what happened in the last three years is basically a fast track consolidation in China.
Speaker: This process of consolidation is happening over the course of three years and we've cut the size of the market by half.
Speaker: And all the private developers have either find themselves in financial distress, going through defaults, that restructuring.
Speaker: Or simply closing doors, right?
Speaker: That's right.
Speaker: That's right.
Speaker: But this is all done in three years.
Speaker: So if you look at this market, right, the impossible has not become possible.
Speaker: Nobody felt that, you know, the bankey would be bailed out.
Speaker: But it is happening.
Speaker: It has happened, and actually it's happening fairly quickly.
Speaker: So you now probably have a situation where there are only, I don't know, but five or six very large real estate developers that have survived this downturn, and they will be basically running the show to a large extent, right?
Speaker: Yeah, in the listed universe, right, there are maybe five or six, SOEs, stocks with state-owned, either central or regional, and then in the private world, you may only have one that the market is really considering.
Speaker: But what has happened with those massive inventories, these stories of people going to cities and saying, listen, for half an hour, I was driving into the cities, I only saw empty apartment blocks and these sort of things.
Speaker: So there is a very large inventory of housing in China.
Speaker: Is that now gone?
Speaker: What is happening with that?
Speaker: So there is still oversupply in China, but inventory is being cleared progressively, particularly in the key cities, I think.
Speaker: Beijing, Shanghai, Guangzhou.
Speaker: That's right, and the core, top, second-tier cities.
Speaker: And the reason behind that is because there is actually a shortage of new home supply in the market.
Speaker: Mm-hmm.
Speaker: What this actually means is that the last three years, because of the crisis, developers weren't really investing in Newland Bank.
Speaker: So what you add in total stock versus how quickly you are selling the projects.
Speaker: You see a difference there, right?
Speaker: If projects are selling faster than how much you're adding, then you are clearing.
Speaker: So effectively, what that means is that we are clearing.
Speaker: We're not clearing this overnight.
Speaker: But also, there is an added layer to that.
Speaker: that is the government also stepping in to help with this process.
Speaker: Oh, for example.
Speaker: So effectively what the government is doing is they're trying to take back the undeveloped land plot from the developers.
Speaker: For instance, China Banking announced that there will be an RMB 20 billion scheme to be acquiring undeveloped land plots.
Speaker: And you see selected regional developer also making progress on that front.
Speaker: So I think it's all working together.
Speaker: Sales picking up, not having a lot of addition in the system, and then the government's policy also driving this clearance process.
Speaker: Okay, so that sounds good.
Speaker: But how confident can you be if there's still a lot of inventory that needs to be cleared that this is actually a sustainable recovery?
Speaker: Or is there a risk that in the next two months having a couple of months of good sales that suddenly poof,
Speaker: it falls apart like a kind of a fallen souffle.
Speaker: It just doesn't go anywhere.
Speaker: I think at the moment what I can share with you is we wrote a piece exactly talking about 10 signs that we feel to us is very clear that this is the market bottom.
Speaker: Writing this piece was very, very easy.
Speaker: It literally took me five, 10 minutes.
Speaker: Three months ago, you have to find anything positive about the market trying to justify this bottom, this recovery.
Speaker: It was a very tough job.
Speaker: Just a side question, because we've spoken about this in the past.
Speaker: Interest rates in China are very low.
Speaker: So if you put your money in a bank, you get 1%, 1.5%, something like that.
Speaker: But if you buy a property and are able to rent it out, you get like 3%, 3.5% or something like that.
Speaker: So is that a factor that helps?
Speaker: Clearly, some people want to buy, but is there something like that dynamic at play as well?
Speaker: Yeah, I think the math actually works out in the lower tier cities.
Speaker: So you think about the rental yield concept, that actually works better for the lower tier cities because prices have dropped quite a lot more.
Speaker: So naturally, your yield will be higher.
Speaker: But for home buyers, right, in this sort of market environment, any incremental demand that we see, it's really driven by genuine housing demand.
Speaker: So you're either buying because you don't have a home at the moment,
Speaker: You got married and you need a home.
Speaker: Or maybe you have one already, but you're looking to upgrade.
Speaker: What we see to be exceptionally strong is upgraded housing demand.
Speaker: Upgrade.
Speaker: So that means people got a house, but, you know, it's one of these things, 35 years old.
Speaker: That's right.
Speaker: But I think that's actually really interesting.
Speaker: A conversation came up over lunch today.
Speaker: We're talking about how the younger generation, clearly demographics is against us.
Speaker: Younger generation don't necessarily want to have kids.
Speaker: Marriage rate dropping quite fast.
Speaker: But what that actually means is that consumption behavior in housing will also change.
Speaker: The younger generation these days, maybe they like to think more about the standard of living themselves a little bit more.
Speaker: And also, clearly, there is uncertainty tied to future job security and their career progress.
Speaker: So with that, right, we may look at a situation whereby in the next 10 years or so, the behavior when it comes to home purchase decision.
Speaker: Might change.
Speaker: Will change in such a way that you may all of a sudden looking at a lot more household with only two members, you know, just a couple.
Speaker: But actually, you may be living in a much larger apartment and you don't necessarily need to be in the city center.
Speaker: So Michel, let me ask you this.
Speaker: So you were positive on property in China.
Speaker: It seems it's moving in the right direction.
Speaker: We might well be in some sort of long term adjustment in this market.
Speaker: What do you need to see?
Speaker: And again, I'm talking about bricks and mortar here.
Speaker: What do you need to see in the physical market that makes you even more positive?
Speaker: Or what are the factors that make you more confident that this is really taking place?
Speaker: Yeah, to answer that question, Harold, I need to recap our base case.
Speaker: Our base case is that the top tier cities, the core tier two cities will recover and will do well with volume and with price stabilizing and maybe a little bit of a home price growth.
Speaker: But I've never baked in a nationwide recovery, meaning that we should not be looking at a number whereby national sales across the board.
Speaker: That's because inventory you mentioned in some of these places is still very high.
Speaker: Inventory and some lower tier cities just simply do not have the economics.
Speaker: They don't have the jobs.
Speaker: They don't have the industry supporting a vibrant housing market.
Speaker: So if we were to think about an absolute blue sky scenario, that is not in my current base case, is that maybe we wake up tomorrow and all of a sudden you see the volume also surging in the lower tier cities.
Speaker: Then that would really change not just my base case assumption, but I think that would also change the market's base case assumption.
Speaker: And policy-wise, is there anything else that you feel that they need to do?
Speaker: Or...
Speaker: Do you have the impression that it's moving in the right direction, that they just take a hands-off approach?
Speaker: Yeah, I think a lot has been done.
Speaker: I don't think we need new policies, even though clients are continuing to ask, hey, what are the new policies?
Speaker: I think we've announced a lot, and the market is already stabilizing, so no new policies is probably a fair assumption.
Speaker: I think the government would need to double down on clearing stock, though.
Speaker: So if that can happen, right, that would then be, I would say, a catalyst on its own to strengthen this recovery, maybe to even accelerate the pace of this recovery.
Speaker: So Harold, what does it mean to you as a strategist from that perspective if property all of a sudden comes back with a clearer recovery track?
Speaker: And if maybe there will be more upside to this pace of recovery from now, what does it mean to global markets?
Speaker: Well, this is really important because some of the themes that you've spoken about in your sector, what's happening in the physical property market, is playing out in Chinese equities as well.
Speaker: There's industry consolidation taking place.
Speaker: It makes sense to put money into equities because actually what you get in deposits is extremely low.
Speaker: sentiment is shifting.
Speaker: And that's partially also because, of course, what happens in the property market.
Speaker: But clearly, if you look at the performance of the Chinese equity market, it's done better than, say, the US market.
Speaker: So it's one of the better performing major markets around the world year to date.
Speaker: So you see funds are coming back in, partially because of the recovery in property we see, but also that we see similar sort of
Speaker: trends, consolidation happening in some of the other industries.
Speaker: So there's a clear shift in sentiment, I have the impression, with regards to the outlook for Chinese equities, not too dissimilar to what you're talking about in Chinese property.
Speaker: Well, Michel, thanks for coming on to the podcast.
Speaker: And hopefully we can get another chat with you later on in the year to see how this is progressing.
Speaker: Thanks for having me on again.
Speaker: Fantastic.
Speaker: And that's all we've got time for on this episode of Under the Banyan Tree.
Speaker: Many thanks for joining us.
Speaker: And be sure to give the macro brief from HHBC Global Research a listen for our later views on the top economic stories around the world.
Speaker: HSBC's Global Investment Summit is less than three weeks away.
Speaker: If you're joining us here in Hong Kong, we look forward to welcoming you.
Speaker: For now though, it's bye from all of us.
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Speaker: We hope you enjoyed the discussion.
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