Chinese banks $364 billion property exposure
There is no doubt that Chinese investors are playing a major role in the worldwide real estate market and a recent report by Fitch illustrates this fact perfectly. The report shows that Chinese corporate loans backed by property have increased fivefold since 2008 which together with a tripling of mortgage finance in China equates to bank exposure of $364 billion. This exposure relates to the four largest banks in China which are covered by the credit rating agency Fitch. So, what does this mean for both the Chinese and worldwide real estate markets?
Heavy dependence upon property
Over the last couple of years we have seen a significant outflow of funds from China to real estate markets around the world. We’ve also seen concerns about property bond defaults which have made a difficult situation slightly more uncomfortable. When you bear in mind that at its peak the Chinese real estate market accounted for 30% of GDP this is a very important sector of the Chinese economy as a whole. Over the last year we have seen significant property price falls across China’s major cities placing more focus upon the Chinese real estate market.
Indeed, from a banking perspective traditional property loans now account for 40% of business which could be closer to 60% when taking in specialist loan facilities. This excessive exposure is placing pressure on Chinese banks, as well as the authorities, who are very keen to keep the economy ticking over.
Not all doom and gloom
Some experts believe that the recent reduction in Chinese property prices is heaven sent and has given something of a wake-up call to Chinese real estate investors. The market had become very frothy due to excessive demand, reduced supply and a trend for real estate investment. It is also worth noting that recent data on property sales has shown some improvement which will reduce the immediate pressure on bank finance and lending ratios.
The fact that the recent buoyancy of Chinese real estate prices has received something of a wake-up call over the last few months could be a blessing in disguise. If the Chinese real estate boom had been allowed to ride the crest of the wave for much longer then prices would have been more stretched and any eventual “rebalancing” much more severe.
More encouragement for overseas investment
There is no doubt that recent issues with the Chinese real estate market have opened the eyes of many investors who are now looking towards international markets. It is no surprise to learn that the likes of London have benefited enormously from Chinese investment where prices look “relatively cheap” compared to some of their Chinese counterparts. Even though some of the London prices quoted at the moment look expensive to domestic investors perhaps this situation is not as severe through the eyes of Chinese real estate investors?
It will be interesting to see how the Chinese real estate market performs in the short to medium term once prices consolidate at lower levels. Will Chinese investors return to their homeland or will they look to rebalance their portfolios with international exposure?