Will 'Healthy Survivors' Benefit From China's New Property Support Measures?

By UOB KayHian

On May 17, China rolled out a package of new measures to support the property market. Three of those were on the demand side. Minimum down payment ratios for first and second homes were lowered from 20% and 30%, respectively, to 15% and 25%. The mortgage rate floors for first and second homes were removed.

In addition, the People’s Bank of China, the nation’s central bank, will provide 30 billion yuan ($4.15 billion) in low-cost pledged supplementary lending (PSL) at a rate of 1.75% to banks. The banks can then lend the money to local state-owned enterprises (SOE) to buy unsold existing homes from developers for conversion into government-subsidized homes that can be rented or sold.

On the supply side, the government will speed up implementation of its “white list” policy designed to provide liquidity support for high-quality property developers. Developers are also being encouraged to start construction on undeveloped land they hold. Finally, with support from the central government, local governments will repurchase land from distressed developers and use it to build more public housing.

We think removing the mortgage rate floors is a positive surprise. It has the potential to improve homebuyer expectations as the global economy inches towards the end of the current tightening cycle. However, banks will face constraints cutting mortgage rates as the loan prime rate (LPR) remains unchanged. Given a 25 basis point drop in the housing provident fund (HPF) rate, we expect mortgage rates for first and second homes to drop by 25 basis points as well to 3.34% and 3.91%, respectively.

We can’t rule out the possibility of banks cutting mortgage rates in the next year at the central government’s urging. And future LPR cuts might give them further incentive to do so and serve as an important driver of future property sector growth.

Distressed Developers Struggling For Relief

The removal of the mortgage rate floor comes as an upside surprise and can probably make up for the limited scale of the PSL that will support cutting the supply glut. The policy mix speaks to the government’s generally cautious approach to addressing problems in the sector. Moreover, the government has also taken some measures to increase the supply of public housing, including instructing local governments to purchase unsold units from developers and turn them into government-subsidized rentals or homes for sale, and repurchasing land from struggling developers for construction of public housing.

By the end of 2020, fewer than 20% of urban residents were living in public housing. But the recent move highlights the government’s strong tendency to increase the supply of public housing and gradually shrink the scale of private housing.

The latest policy mix will be more effective in stabilizing the sector than previous measures, and the approach is more balanced. Therefore, we should see this as a positive development for the sector. Although most distressed private developers are not in line for government rescues, the healthier ones that survive the downturn will eventually come back as the market recovers.

Among all the property stocks, we are positive on the prospects for Longfor Group (0960.HK). With its better solvency profile and solid recurrent revenue, we expect the company to rank among the primary surviving players in the sector, and thus maintain our “buy” rating with a target price of HK $17.89, 20% higher than the current share price.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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