Improving Home Sales Fail to Revive China Real Estate Investment

Several months of policy tweaking by Chinese authorities appears to have revived home sales, but the country’s all important real estate sector has yet to see a revival in investment levels, according to newly released figures from China’s National Bureau of Statistics.

Total investment in real estate over the first seven months of 2015 grew by 4.3 percent compared to the same period last year, down from 4.6 percent growth during the period from January through the end of June.

The slide in investment by the country’s real estate enterprises came despite a steady rise in property sales through 2015, and also appears to be suppressing sales of land for launching new projects.

Investment Growth Lowest Since the Economic Crisis

Although China’s real estate enterprises put RMB 5.26 trillion into new projects during the period from January to July, the 4.3 percent rate of new investment was the lowest that the country has recorded since 2009, when markets globally were slowed by the economic crisis.

The outlook for further investment is also not encouraging, as growth in land sales continues to disappoint. The rate of land sales, which is determined as much by local governments seeking opportune times to bring in revenue as it is by demand, was down 32 percent year-on-year, in terms of total area sold, during the first seven months of the year.

July did see a slight improvement in the land sales trend, however, with the rate of decrease in sales narrowing by 1.8 percentage points compared to the 33.8 percent drop off that had been recorded in the first half of the year. By the end of the month some 121.13 million square metres of land had been sold in 2015.

The reduction in auctions of new sites is also hurting government revenues, with China’s cities and towns suffering a 25.6 percent drop in revenues from land sales compared to the same period last year, and the rate of decrease widened by 3.3 percentage points compared to the period from January to June.

Many analysts believe that land sales remain the primary source of revenue for most of China’s local governments. When China last updated the relevant figures in June 2013, it said that local governments owed RMB 17.89 trillion ($2.88 trillion). Since that time experts estimate that number has swelled to RMB 25 trillion.

During the first seven months of 2015, the revenues from land sales that are needed to repay that debt reached RMB 359.3 billion.

Sales Up by 13.4 Percent in 2015

The continuing reluctance by China’s property developers to take a risk on new land and to invest in more property projects is perhaps even more vexing to the government given the improving revenue picture for many of these companies.

During the period from January through July total real estate sales grew 13.4 percent compared to the first seven months of last year, reaching RMB 4.12 trillion so far this year. Sales of housing, which make up the majority of those sales, were up by 16.8 percent.

The reason for reluctance on the part of China’s property developers can be seen, however, in the bureau’s figures on real estate inventories, which continued to climb last month. Despite the improving sales, China’s backlog of unsold homes is estimated to have increased by 2.21 million square metres last month, to now stand at 430 million square metres of space.

Thanks to the large pipeline of projects that were started before the 2014 downturn, through the first seven months of 2015 China’s inventory of unsold homes has now increased by 18.1 percent compared to the same period of last year. However, the rate of increase in unsold homes at least appears to be slackening, with the growth rate falling by 1.2 percentage points from last month’s 19.3 percent rate.