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China volatility turns RE investors cautious

Despite new policy measures, China’s economic slowdown will continue to adversely impact the property sector, particularly the retail sector and local developers, according to industry reports.  

Uncertainty about the future for China’s economy and its ongoing stock market volatility will add pressure on its real estate sector and the government’s raft of policy countermeasures are unlikely to have any positive impact if its economic growth continues to slow down, property sector experts have warned.

Earlier this week, the People’s Bank of China (PBOC) cut the country’s benchmark interest rate by 25 basis points and its bank reserve requirement ratio by 50 basis points. There were the latest among a suite of measures being implemented to stem the unprecedented decline in China’s benchmark Shanghai Composite index. The index has lost 22 percent of its value in five straight days of losses ending yesterday, believed to be the first time in decades that the index has fallen this fast in a period of five days. Since June, the index has seen a 43 percent drop.

In a note released earlier today, global property services giant CBRE said that with the latest interest rate cut, the mortgage rate has come down to a historic level, which should help in a recovery in the housing market. However, it cautions that the support from lower mortgage rates would be curtailed if economic growth turns out to be worse than expected.

The firm said the retail sector in particular is expected to be adversely impacted by the stock market volatility and a slower GDP growth, given that the sector is already facing a supply glut and competition from e-commerce.

Real estate investors are also likely to remain cautious and take a longer time to complete deals. According to CBRE, this could lead to an increase in the cap rates in some of the lower-tier cities and the retail sector.

Furthermore, a sluggish domestic real estate market would further prompt Chinese investors to invest more capital in overseas markets instead. According to CBRE’s rival Cushman & Wakefield, Chinese investors invested $4.4 billion in US real estate in the first half of this year, considerably higher than the $1.5 billion invested in the same period last year. Similarly in Europe too, Chinese outbound investments were estimated to be $2.6 billion, as compared to $1.6 billion in the first half of 2014.

Earlier this month, the PBOC also devalued the RMB by 3 percent in a bid to revive falling export numbers, which is expected to negatively impact the local real estate developers. According to a further property services firm, Colliers International, developers with overseas funding will be pressured to reassess their business strategies in China and hedge against losses. It further added that those developers which have a high gearing of overseas funding may need to sell off assets due to increased financial pressure.