Hard Landing for China's Real Estate Sector Remains Unlikely, Says CBRE

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This past week China's economy posted 6.7% y-o-y GDP growth in Q3 2016, on par with H1 2016 levels. Structural reforms continue to progress well, with the service sector's contribution to GDP growth rising 1.6 ppts y-o-y to 52.8% in the quarter. Year-to-date retail sales registered steady y-o-y growth of 9.8% in real terms. Stable GDP growth continues to be supported by the rapid expansion of credit, with total incremental loans exceeding RMB10 trillion in the first nine months of 2016.
 
The real estate sector accounted for 8% of GDP growth this quarter, while related sectors such as steel and concrete production showed further signs of recovery. The housing market boom and stronger industrial sector offset disappointing foreign trade data, demonstrating their evolving importance as new drivers of economic growth.
 
So what does it mean for real estate?

According to global real estate consultant CBRE Group, the following:
 

• Economic policy set to turn more cautious: GDP may weaken slightly in Q4 2016 but full year growth will be well within the government's target of 6.5-7.0%. An economic hard landing is extremely doubtful, with ample room remaining for further policy stimuli such as interest rate cuts, which are unlikely in the short-term. As the economy remains on track, CBRE Research believes overall economic policy will turn more risk-averse to guard against any deterioration in growth. Less aggressive monetary policy and slower residential sales due to recent policy tightening in upper tier markets are likely to place downward pressure on the economy in Q4 2016.

• Geographical imbalance in growth expected to persist: While some progress has been made this year, reducing overcapacity in the coal, steel and heavy manufacturing remains a key focus for the central government. The current geographical imbalance in economic growth will continue, with regions suffering most from overcapacity and population outflows, such as provinces in the country's North East, set to continue to underperform.

• Service sector growth to drive solid demand for commercial real estate: Service sector growth stood at 7.6% y-o-y in Q3 2016, well above the expansion registered in the primary and secondary sectors. While nationwide office net absorption is forecast to dip by 20-25% y-o-y this year, primarily due to the crackdown on the Peer-to-Peer (P2P) financial industry, strong service sector growth will translate to robust demand for office space.

• Growth in real estate loans expected to slow: Policy tightening in upper tier cities is expected to prompt a slowdown in real estate loan growth in the coming months. Mortgage loans accounted for approximately 55% of total loans issued in Q3 2016, but the ratio began to decrease in September.

• Real estate hard landing remains unlikely: Changes to policy settings will remain gradual and focused on upper tier markets, meaning that a property market crash is highly doubtful. Major markets are fundamentally benign and will respond if policy is loosened again if required.

• Property yields to stay tight: The likelihood of cuts to the lending rate and RRR rate before year end is minimal, while interest rates are expected to remain unchanged. CBRE Research data show local buyers accounted for 80% of transactions in the first three quarters of the year, reflecting domestic investors' strong appetite for income-producing commercial real estate assets in tier I cities. This will ensure property yields remain tight in the short term.