Deleveraging & China's real estate sector

How has deleveraging impacted China's residential real estate sector and what opportunities has it created?

15 Mar 2018

In late-2016, the Chinese government launched its deleveraging campaign to get serious about debt in the financial system. Since China's real estate sector took approximately 42% of total financing in the economy in 2016, according to the UK-based Royal Institute of Chartered Surveyors, it's a prime target for the deleveraging campaign.

Part of the build-up of debt in the real estate sector has been down to the government because it has boosted economic growth by channeling loans to developers, allowing shadow bank financing to the sector, and periodically removing purchase restrictions to boost sales and investment.

But the situation is different now that China's government is focused on sustainability. Developers must become more competitive, re-evaluate their business models, use resources more efficiently, and meet development targets.

Major changes introduced in the past two years include restrictions on developer bond issues, curbs on financing via wealth management products, strict qualification criteria to enter land auctions, tough oversight over bank lending, and huge fines for bank sector loan officers if they don't comply with new rules.

These policy changes have driven record levels of sector M&A. Smaller developers have been pushed out of the market and highly leveraged firms have liquidated their land assets and projects, resulting in M&A worth USD 108.5 billion in 2017, up 112% y-o-y, according to data compiled by Pricewaterhouse Coopers.

Source: PWC, 2018

Large-scale developers have used the opportunity - and bumper 2016 sales revenues - to expand market share, pay down debt and focus on profitability. Market concentration has increased, with the top 10 developers by sales in 2017 accounting for 24% of total sales, compared with 10.1% in 2010.

But China's deleveraging drive is by no means over. Policy statements following the October 2017 National Party Congress reaffirm the government's commitment, and the industry will continue to face financing pressure in the coming years.

In this environment, developers who have focused on improving operations, diversified nationally, and boosted their land reserves through M&A, are emerging as sector leaders and look well set to expand in the future.


UBS Asset Management in the United States

The website contains general information about UBS Asset Management (Americas), Inc., UBS Hedge Fund Solutions LLC, and UBS O'Connor LLC, collectively known as "UBS Asset Management". The information contained on this website does not constitute investment advice or a recommendation to purchase or sell any securities or other financial instrument or any particular strategy or fund. Market commentary, product information and related performance data available on this website has been compiled from sources believed to be reliable and is provided in good faith for informational purposes only. UBS Asset Management does not guarantee the accuracy, suitability or completeness of information contained on this website, and all such information, including but not limited to performance data and related metrics, is subject to change without notice. Certain content on this website is intended for institutional investors and their financial representatives only, and should not be relied upon by retail investors or members of the general public.

Market commentary and similar statements contained herein are based on current expectations and may be considered “forward-looking statements.” Actual future results, however, may prove to be different from expectations. The opinions expressed are a reflection of UBS Asset Management’s best judgment at the time of posting, and any obligation to update or alter any forward-looking statement as a result of new information, future events, or otherwise is disclaimed.

Investments involve risks, are not guaranteed and may not return the original principal amount invested. Past performance is no guarantee of future results. Investors should read all available product information carefully before making an investment decision, including information about applicable risks, fees and expenses. This website does not address the investment objectives, risk tolerance or financial needs of any particular investor. In addition, any statements regarding investment performance expectations, risk and/or return targets do not constitute a representation or warranty that such expectations or targets will be achieved.

This website is not intended for persons located in any jurisdiction where the availability of this website is prohibited or contrary to local law or regulation or would subject any UBS entity to any registration or licensing requirement in any such jurisdiction.

Please confirm you are a US resident to proceed.

Confirmation
Please select at least 1 checkbox