Institutions assess impact of distressed China property sales

Rising levels of distressed sales in China’s property sector paint a distorted picture of the sector’s woes, according to investors and advisers.
Institutions assess impact of distressed China property sales

On the face of it, sharply rising levels of distressed sales in China’s property sector should ring alarm bells.

However, institutional investors and industry advisers have indicated that market conditions could be improving following high-profile defaults of major property companies in the country during 2021 and 2022.

The proportion of China’s property sales categorised as distressed surged to $2.7 billion in Q1 2023, more than 10 times the $760 million level a year earlier, according to the latest APAC Capital Trends, report for Q1 2023, published by MSCI Real Assets (formerly Real Capital Analytics).

But Toby Selman, who leads property investment strategy at the New Zealand Superannuation Fund (NZ Super) said the fund was not against investing in the sector in China, while pointing to the slow pace of investor activity currently there.

“Despite the movement of people now COVID restrictions are lifting, the movement of capital hasn’t yet come back,” he said, adding that liquidity constraints compounded the Chinese government's restrictions on investor flows in and out of the country.

“In China, liquidity has fallen and there are fewer buyers, which is a factor to consider if you're holding assets,” Selman said.


Distressed sales made up 10% of the Chinese property market by value in Q1, according to the MSCI report, up from 1% in Q1 2022. Heavy selling of distressed assets was also a feature of Q4 2022, with a total of $2 billion.

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Ben Chow, vice president, head of Real Assets Research, Asia, for MSCI, suggested that high volumes of distressed sales represented a loosening of the market as buyers returned to the sector keen to take advantage of low prices before China’s improving economic circumstances saw sellers withdraw.  

“Investors could sense that something was about to give towards the end of the year, and that may have been why distressed sales began to pick up," he said.

"Sure enough, both the Covid-zero and three-red-lines policies [measures that put caps on debt ratios and asked property developers for more detail on their indebtedness] were relaxed towards the end of the year.” 

Besides high-profile defaults among China’s leading property companies, such as Evergrande at the end of 2021, considerable distress has also accumulated among small and medium-sized players.

“Last year’s more restrictive financing for the property sector also impacted smaller developers and private investors, and with commercial prices continuing to slip, it's likely that there was a considerable amount of stress building up in this more opaque segment of the market, as well,” Chow said.


This year, the easing of Covid-19 restrictions and a policy softening in Beijing have provided welcome relief to many investors and troubled property companies.

“The Chinese government has adopted a more dovish stance for the property market," said Henry Chin, global head of investor thought leadership and head of research for Asia-Pacific at CBRE.

"Chinese developers have started to receive more bank loans since the start of the year as more favourable policy measures, such as the cut in the reserve requirement ratio for banks, are rolled out.” 

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Investor flows into China’s property in Q1 were $7.7 billion, the largest of any market in the region, according to the MSCI report. This represented a 33% fall from a year earlier, compared with a 43% fall in Japan, to $6.7 billion, and a 72% fall in Australia, to $2.9 billion.

“And the number of deals in China remained the same compared with a year ago. So, activity has been relatively resilient apart from the lack of mega deals within the quarter,” said Chow.

Both he and Chin said the combination of easing and support measures, alongside the opening of the economy, would help in the long run.

“As market sentiment turns more optimistic, the buyer and seller price expectation gap should narrow, which will help facilitate a recovery,” Chin said. He added that values of prime offices in Shanghai and Beijing were already attractive to investors starting to look for opportunities in the space.   

But the prospect of transactions returning remains a long way off, and is partly contingent on a recovery in the residential sector, according to Pamela Ambler, head of investor intelligence for Asia- Pacific at JLL.

“This will take several quarters, in our view, and we perceive this recovery journey to be gradual this time," she said. "In fact, revitalising the residential real estate market [will] be key, given its large contribution to China's GDP.” 

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