KKR says China’s real estate correction may only be halfway done

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107395942 1712127606946 gettyimages 2097725153 cfoto highrise240323 npum3

Nighttime in Qingdao, East China’s Shandong province, sees high-rise buildings beautifully lit up. Real estate issues continue to plague China, contributing significantly to its stalling GDP growth. This is according to a report by global investment company KKR. Henry H. McVey, the firm’s global and macro asset allocation, gleaned this insight during his recent trip to China, marking his fourth visit in just over a year.

According to the report, co-authored by KKR’s chief economist for Greater China, Changchun Hua, the Chinese real estate industry’s over-investment must be addressed as a matter of urgency. Secondly, it’s crucial to restore confidence to drive down savings, which would encourage businesses and consumers to invest in higher-quality products, a strategy promoted by Chinese authorities.

At its peak, the real estate and associated sectors constituted over 20% of China’s economy, only to decline following Beijing’s clampdown on the heavy reliance on debt for growth by property developers. The KKR report suggests that China’s housing market correction might currently be only halfway through. Further measures are needed to rectify this, beyond the contraction in volume that has been seen so far.

The KKR report did not offer in-depth insight into specific real estate policy expectations but stated that additional measures from Beijing to enhance China’s real estate sector could notably alter investor perception. External geopolitical tensions, along with the slump in the property market and drop in stocks have made many foreign institutional investors weary about investing in China.

The KKR report explains that several investors have considered reducing their China exposure from 10-12% to 5-6%, despite economic fundamentals likely bottoming. Notwithstanding, official Chinese data for the start of the year surpassed analysts’ expectations. Chinese authorities stated a shift in focus towards manufacturing and high-quality development away from the real estate sector, which is said to be undergoing a period of adjustment.

With real estate slowing its GDP growth, KKR anticipates a mild decrease to 4.7% this year and 4.5% in the following year. With the ongoing correction of the property sector, combined with potential further policy support, it’s thought that this drag will lessen over the next few years.

Digitalization and the transition towards a more carbon-neutral, green industry are expected to remain the primary drivers of growth, despite modest increases in catering, accommodation, and wholesale contributions. However, for investors, whether authorities can simplify capital market access for households and businesses will be more influential than GDP growth.

Ni Hong, the Minister of Housing and Urban-Rural Development, indicated that bankruptcies should happen among developers if required and pledged to promote the development of affordable housing. Recent data suggests some stability in the property market slowdown.

Most of KKR’s local portfolio is in consumer and services companies, revealing that the middle to higher income Chinese spend modestly to upgrade their lifestyles. KKR believes that, based on historical precedence, China can adapt its policy to be more investor-friendly in the long term.

According to global investment firm KKR, China’s real estate industry needs to be addressed quickly if GDP growth is to pick up significantly. The firm’s head of global and macro asset allocation, Henry H. McVey, noted that the real estate industry is overbuilt and needs to be dealt with promptly. Furthermore, he highlighted the need for consumer and business confidence to be restored to stimulate spending on higher quality goods. The Chinese government has been urging for such a change, after the property industry experienced a slump due to a crackdown on developers’ high reliance on debt for growth.

The KKR report suggested that China’s housing market correction may be only halfway through considering comparisons with the housing corrections in the U.S., Japan and Spain. The report suggested that both price and volume need to come under pressure so that the ‘cleansing cycle’ can come to completion.

Despite the difficulties, the report authors expressed hope that if Beijing made efforts to improve the real estate sector, it could significantly shift investor perception. However, geopolitical tensions, a slump in the property market and a drop in stocks have caused hesitations among foreign institutional investors about investing in China. KKR’s research has shown that many allocators are considering reducing their China exposure to 5-6%, down from 10-12%.

KKR predicts China’s GDP growth to slow down to 4.7% this year and 4.5% the following year, with the impact of the real estate woes and Covid-related factors halving their drag on the economy from 1.4 percentage points in 2024 to a 0.7 percentage point drag in 2025.

On the brighter side, sectors such as catering, accommodation and wholesale are expected to modestly increase their contribution to growth in the coming years. As for investors, the report stressed that the key development would be whether authorities can make it easier for businesses and households to access the capital markets. It further suggested that addressing the weak spots in the economy, especially housing, would help improve the cost of capital and allow new consumer companies to access the capital markets at better prices.

The report also highlighted that the firm’s local portfolio is majorly in consumer and services companies that show how Chinese people in the middle to higher income range are modestly upgrading their lifestyles. While acknowledging the existence of local challenges, the report remained hopeful that the Chinese market has the potential to rebound significantly from current levels if domestic policies became more investor-friendly.

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