Ping An - China’s biggest insurance group and also the world’s largest with assets worth US$1.25 trillion – has said it will continue to build its property portfolio despite China’s ongoing funding crisis in the real estate sector.
At the announcement of its interim results for 2022 on August 24 (Wednesday), the company said it had not booked any further write-downs on its property portfolio in the first half.
This follows significant impairments last year related to troubled developer China Fortune Land which caused the insurance and financial services group to take a Rmb18.2 billion ($2.8bn) hit from its exposure to the developer, cutting first-quarter profits.
Ping An Chief Investment Officer Benjamin Deng told a press conference at the release of the unaudited results the group would continue to invest in real estate in line with its broader policy.
“All of the risks are well under control,” Deng said. “Property is a comprehensive reflection of the macro economy at this moment and as long as we speak with the principle that property is for living, not for speculation, I believe that our property market in China will have a bright future.”
Though a recent spate of mortgage strikes by homebuyers across China has exposed the numerous risks that have accumulated in the market over the past two decades, Deng said he believed high-quality physical property would remain one of Ping An’s main investment targets over the long term.
He said the non-performing ratio of the Ping An property portfolio was better than the industry average.
“You can see that out of our total allocation, 50% of them are real assets that can drive long-term and reliable cashflow out of rentals,” he said. “They are able to cater for our needs in terms of liabilities.
HUNT FOR YIELD
“As for the longer term plays such as industry campuses, data centres, logistic facilities and other infrastructure, we will remain highly interested, or even increase, our allocations for high-quality real estate assets.”
Analysts also believe that the recent mortgage boycotts – sparked by developer inability to finish housing projects due to funding shortfalls - are likely to pose only limited systemic risk in a country where demand for housing is still growing.
Yi Wang, head of the Asia Pacific real estate team at Goldman Sachs Research, said in a note that while the boycotts signify the distress in China’s property market, the government is seeking to rebalance the sector.
She estimates it would cost the government about RMB600 billion (US$98 billion) to completely eliminate the “completion risk” for the next year. however there are longer-term factors at work in the housing market, which has been an important source of economic expansion and investment in China.
URBANISATION THE DRIVER
“The key demographic drivers for the housing market are population growth and urbanisation, which translate into urban housing formation,” she said. “But these are slowing. The population is growing a lot slower than it was 10 years ago, and more than 64% of the population now lives in urban areas and so that urbanization trend is also slowing.”
She said despite making accommodation for these adjustments, Goldman Sachs research still expects a multiyear downturn in China’s housing market?
“The government likely initiated this deleveraging process because they know that the current supply capacity is way above the long-term underlying demand level. Shrinking the supply capacity is needed to avoid more pain down the road,” she said.
Fitch Ratings, meanwhile, said it did not believe the scope of defaults was serious enough to directly affect Chinese banks, with most disclosing that affected mortgage loans amount to less than 0.01% of their outstanding residential mortgage loans.
It cautioned that if defaults escalated, the economic and social implications could be broad and serious but at the moment most of the damage from mortgage boycotts had been focused mainly in less-developed regions that have a large and concentrated exposure to distressed developers.
LOOKING FOR THE REBOUND
“Our base case assumes that China’s property sales will stabilise in 2H22, based on our current expectation of a 25%-30% decline in 2022 sales, followed by low single digit growth in 2023,” Fitch said in a report.
“A delay in the recovery of sales would further damage the performance of property-developer loans and, potentially, residential mortgage loans.”
The reported property-development non-performing loan ratio for Fitch-rated banks reached 2.7% in 2021, from 1.8% at end-2020, while the residential mortgage non-performing loan ratio remained stable at around 0.3%.
“The mortgage boycotts highlight the importance of tight regulatory oversight of escrow accounts, and we do not expect local governments to provide liquidity relief to property developers by relaxing controls over the use of such funds,” the report said.
“As such, the funding environment is likely to remain tight for developers until property sales show a sufficient and consistent recovery.”