It Looks Like 2 Years at a Minimum Before Things Can Turn Around for China’s Property Sector

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Because property development and aspects of homeownership once accounted for some 25 percent of China’s economy, declines in this sector have weighed heavily on growth prospects. The first signs of a lasting solution have, however, at last emerged.

Existing developers have begun to have successes rescheduling their finances. But this is only the first step in laying the groundwork for recovery. After this financial process is complete, developers will then have to use the newfound financial flexibility to remedy the failings and excesses that have kept the sector in decline. These additional steps will take time, probably until 2027. Only then will this burden on China’s overall economy begin to lift.

This financial restructuring has been a long time coming. Because Evergrande’s failure was only the start of the long list of developers reporting financial problems, China has since suffered declines in construction activity and homebuying.

What is more, the weaknesses these failures brought to Chinese finance generally limited prospects for economic activity, often in areas distant from property development. Beijing would have had a hard time mitigating these ill effects even if it had moved quickly to add liquidity to financial markets, for instance, and indemnify debts when necessary.

Whatever the cause of the delays, the process has at last begun this year. So far, eight of China’s ten most indebted property developers have put the bulk of their offshore debt rescheduling behind them. To be sure, Evergrande and China South Holdings have received liquidation orders, but Sunac China Holdings has finally gained majority support among creditors for its offshore restructuring. Yuzhou Group Holdings has also recently concluded a restructuring deal with its creditors. Cifi Holdings has reached a deal to restructure the equivalent of $8.1 billion in offshore debt and reports that it is nearing shareholder approval. Country Garden Holdings reached an agreement to convert the equivalent of some $1.14 billion of offshore bonds into equities.

While these financial fixes may relieve some of the uncertainties that have plagued Chinese finance since 2021, they are only the first step in resolving the property crisis. Now, the developers must finish the apartments long promised to Chinese families—in many cases already paid for—so that these families can take possession of an asset that has remained uncertain for years and accordingly get on with their lives, including a resumption of consumer spending that the Chinese economy sorely needs and that Beijing has been trying without success to stimulate.

Relieving financial constraints will also facilitate the resolution of the still-huge inventory of unsold apartments across China, many in less sought-after locations. Before the crisis broke, developers had built a lot on speculation of future sales. Now, these buildings are empty.

There can be no concerted growth until this inventory overhang comes down dramatically. Beijing has implemented some measures to reduce it, such as buying apartments to reconfigure for low-cost housing. Still, the ultimate solution will require developers to get these properties off the market. These efforts will take a long time. Accordingly, it looks like 2027 will be the earliest time before declines can even begin to turn into expansion.