Chinese downturn could benefit Middle East construction

16 January 2024
The residential sector has weighed on the performance of the construction market in China

A downturn in China’s residential construction sector weighed on the construction industry’s output in 2023, according to a recent report by GlobalData. The sluggish performance could increase the appetite of Chinese construction companies for work overseas in markets such as the Middle East.

China’s construction industry is estimated to have expanded by 6.5 per cent in real terms in 2023, with the industry’s value add expanding by 7.2 per cent year-on-year (YoY) in the first three quarters of the year, according to the National Bureau of Statistics (NBS).

Growth in 2023 was supported by increased investment in transport and power infrastructure projects. According to the National Energy Administration (NEA), China added 191GW of new renewable energy capacity in the first ten months of 2023, a Y-o-Y growth of 90.8 per cent; this consisted of 142GW of solar power, 37.3GW of wind power, 8.4GW of hydropower, and 2.3GW of biomass.

Residential downturn

The downturn in the residential construction sector has weighed on the construction industry’s output in 2023, with the sector expected to have registered a sharp fall of 6.2 per cent in real terms in 2023. This weakness is attributed to subdued investor and consumer confidence amid falling new home prices, elevated debt amongst property developers, and the tightening of government regulations on debt growth.

According to the NBS, the total investment in residential real estate development fell by 9 per cent YoY in the first 11 months of 2023; this followed an overall annual fall of 9.5 per cent in 2022 and growth of 6.4 per cent in 2021.

The construction industry’s growth is projected to slow to 2.8 per cent in 2024, owing to continued weakness in the property sector. In recent months, several cities have eased mortgage rules to support housing demand.

For instance, in mid-December 2023, authorities relaxed homebuying curbs in Beijing and Shanghai – the country’s two largest housing markets. The city authorities reduced downpayment requirements for first-time homebuyers and have changed the definition of “non-luxury homes”, thereby allowing more residences to qualify for lower-rate mortgages. Effective from January 1st, 2024, Beijing reduced down-payment requirements for second homes to 40-50 per cent depending on the location – compared to the previous 60-80 per cent; it also reduced the minimum down payment for first homes to 30 per cent, from 35-40 per cent previously.

Previously, in August 2023, Guangzhou and Shenzhen eased mortgage curbs, allowing home buyers to access preferential loans for first-home purchases regardless of their previous credit records. However, the stimulus measures rolled out by major cities have yet to support a recovery in demand, with the property sector continuing to drag on China’s economic recovery.

The contraction in China’s residential construction activity and new home sales deepened in the first eleven months of 2023, with the total floor space of residential buildings under construction declining by 7.7 per cent YoY, the total floor space of residential buildings on which construction started declining by 22% YoY, and the total value of residential buildings sold declining by 10.1 per cent YoY during January to November 2023, according to the NBS. Moreover, according to the preliminary data released by the China Real Estate Information Corporation (CRIC) in late December 2023, the value of new home sales among the top 100 biggest real estate companies in China fell by 16.5 per cent YoY in 2023, to CNY5.4tn ($800.5bn); this is lower than the institute’s estimate of a 15 per cent fall that year. Only 16 of the top 100 developers reported a sales value of more than CNY100bn ($14.8bn) in 2023 – down from that of 20 in 2022. According to the estimates of CRIC, home sales will remain flat or edge downwards in January 2024.

Delayed projects

Amid a downturn in demand for residential buildings, several developers are struggling to repay debts and complete projects. The country has a CNY3tn ($446bn) shortfall in funding to stabilise the housing sector and complete millions of unfinished apartments. As of late November 2023, the government was finalising a list of 50 developers eligible for financial support; this includes property giants like Country Garden Holdings Co and Sino-Ocean Group. Additionally, to minimise the risk of additional defaults and ensure that housing projects are completed, Chinese policymakers are urging banks to allocate more funding to the property sector. To fast-track the completion of housing projects, the government is focusing on streamlining approval processes, by reducing bureaucracy and eliminating unnecessary delays; this will help in addressing the backlog of unfinished apartments. The government is also prioritising the promotion of affordable housing, to address the housing needs of the population and ensure social stability.

To support the struggling property market, the government is expected to provide CNY1tn ($138bn) in low-cost financing to support the country’s urban village renovation and affordable housing programs. The funding will be provided by the People’s Bank of China through policy banks, to support households purchase homes.

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