“The disappointing progress compounded by lacklustre economic data sets has dragged homebuyers’ sentiment a lot. More bolder measures are needed amid a deteriorating economic environment, if you want to have the effect you expected.”
About 30 Chinese cities have announced details of the scheme and requirements for purchasing unsold flats, according to CRIC data.
Cities taking part may face challenges around criteria for what units to buy, including size, ownership and price range, according to CRIC’s report.
For example, around 20 of the 30 Chinese cities that announced their participation set an upper limit of 120 square metres for the units they would purchase. If the flats are to become rental units, an upper limit of 70 square metres is usually required. Units fitting such criteria may be hard to find, according to CRIC.
In any case, the 300 billion yuan relending facility is expected to buy around 71.6 million square meters of homes, which works out to only 18.7 per cent of the inventory of unsold flats as of the end of June, according to an analysis by China Index Academy.
A S&P analysis showed that the national housing inventory fell by 1.2 per cent to 739 million square metres as of the end of July from a peak at the end of March. The analysis concluded that around 1.7 trillion yuan would be needed to reduce unsold inventory to a healthier level of 500 million square meters.
Local governments had already borrowed all but 12.1 billion yuan of the 300 billion yuan fund as of the end of June, according to official data.
The yield of the flats in question versus the funding cost cities must incur is a major concern, observers said.
The average rental yield across 50 Chinese cities, tracked by China Index Academy, is 2.1 per cent, but the funding cost cities end up paying under the relending facility is around 3 per cent, not to mention costs for renovation and operation.
Meanwhile, the market continues to struggle. Home transactions rebounded in June after the policy was announced, before backtracking in July. Sales value generated by the top 100 Chinese developers dropped to 279 billion yuan in July, down 36.4 per cent compared with June and 19.7 per cent compared with a year earlier, according to CRIC.
“This is more favourable than the relending facilities,” considering the latter’s shorter duration and higher funding cost, according to UBS analyst John Lam.
However, the funding cost of such special bonds, standing at 2.46 per cent, is slightly higher than the estimated average gross residential yield of 2.3 per cent across 50 Chinese cities, he added.
“It is not difficult for local governments to issue bonds, but they need to secure buyers first,” said Jeff Zhang, an analyst with Morningstar. “That said, the amount will likely be limited as the bond issuance quota by local governments is still capped, and financial institutions may hesitate lending to government entities given their high gearing ratios.”