While Chinese top-tier real estate companies gain a more solid financial foundation, small developers in lower-tier cities face rising risks.
Since 2013, Chinese real estate developers have looked overseas for investment opportunities. Led by the developers, Chinese investment in overseas real estate markets reached $7.6 billion, a 124% rise from the previous year. In the first three months of 2014, China’s outbound real estate investment further rose 25% from a year earlier, to $2.1 billion. It is estimated that the Chinese will invest more than $10 billion on commercial real estate alone in 2014.
This trend is likely to continue, as three market leaders–Greenland, China Vanke and Country Garden–have already announced overseas investment plans worth about $9 billion in total. Some real estate companies even intend to allocate almost one-third of their total investments abroad in the future.
Nearly one-third is an ambitious goal, given that most of the real estate projects managed by Chinese developers are based in China. According to National Bureau of Statistics of PRC, the national total investment in real estate was $1.4 trillion in 2013, over 200 times that of China’s outbound real estate investment that year. China’s real estate investment abroad not only has plenty of room to grow, but the trend’s current impact on China’s domestic real estate market is still marginal.
Nevertheless, should the outflow of real estate money continue, China’s real estate industry may witness polarization, with big international players faring well and smaller local companies exposed to greater risks.
Chinese top real estate enterprises enter overseas markets primarily to broaden financing channels and to avert tightened government policies against property development in China. In recent years, tightening policy has led to tighter credit environment and bad sales performances for Chinese real estate companies.
On the other hand, direct outbound investment would allow these companies to tap into money abroad with a lower cost. Interest rate for 5-year bond abroad could be as low as 2.755%, while the borrowing cost in China ranges from 7% to 10% now. By diversifying the projects and associated risks they undertake, real estate enterprises with interest overseas could be a stabilizing factor for China’s domestic real estate market.
Domestic market constraints hinder firms
That said, the majority of Chinese real estate companies are stuck in the domestic market and subject to higher credit risks. In April 2014, a little-known regional developer was on the verge of bankruptcy, as China’s property bubble showed signs of deflation in lower-tier cities. Moreover, property sales dropped 6.9% in the January-April period from a year earlier in terms of floor space, and 7.8% in terms of value. Growth in property investment also reached a new low since December 2002.
Despite the adversities, the central government is likely to continue its gradual squeeze of the real estate bubble in some regions: instead of loosening controls as some local governments and real estate companies wail in pain, the tight policies remain in place.
Before local governments launch any counteractions, small real estate developers in lower-tier cities face dim prospects. As developers that occupy the first tier and overseas markets, they have the potential to be the future backbone of China’s real estate industry.