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New Trends of Chinese Real Estate
New home sales in China have been growing for the past two decades and floor area per capita has surpassed 30 square meters1; similar levels to those seen in developed countries. However, in recent years we have witnessed its slowdown with government’s message of “housing for living, not for speculation”. It is no surprise that investors will question what new trends will emerge and which industries are likely to benefit from the new normal. This report will attempt to address these questions.
A Growing Secondary Residential Market
As shown in Exhibit 1, new home sales increased from 6.2 trillion to 13.9 trillion during 2014-2019 with a Compound Annual Growth Rate (CAGR) of 17.5%. Since 1998, over 17 billion square meters2 of commercial housing sales has created a huge secondary residential market, especially in first tier cities with limited land supply. Exhibit 2 shows that for many years, secondary residential sales have been higher than new home sales in Beijing and Shanghai. Limited space in high tier cities, especially in downtown areas, coupled with population of urbanization and industrialization, will naturally lead to a growing number of secondary home transactions. Home sales by brokerage should benefit from the trend as a result. Exhibit 3 shows penetration in existing home sales is at a very high level of 88%. In the past few years, it has continually extended to new home selling and rentals. Despite this, the real estate brokerage market in China is still very fragmented. In 2018, CR33 for primary/secondary brokers was 9%/20% respectively, compared to 32%4 for US secondary peers. Therefore, we believe, that real estate brokerage can potentially break away from mature property markets and sustain long-term growth in the foreseeable future.
Property Consolidation, Decorative Housing5 and Prefabricated Construction Drive Concentration in Downstream Industries
Leading developers have been gaining market share for years as we discussed in the previous article. China has initiated policies to raise the penetration of decorative housing / hardcover6 to replace the current mainstream concept of bare shell housing. This is aimed at increasing the proportion of pre-fabricated construction in construction sites for the purposes of reducing labor and environmental reasons. The factors work in the same direction to stimulate downstream industries in terms of consolidation, including construction materials like waterproofing and coatings, and housing-related consumer discretionary industries such as home furniture and decoration. For example, in waterproof materials industry, property developers’ centralized procurement in a nationwide strategy benefit leading waterproof manufacturers. These manufacturers have a range of capacities and have subsequently been gaining market share in each region against local players post policy release. This has in turn helped with cost advantages for national-level developers and contributed to the developer-end consolidation; although only to a small extent. We also see from Exhibit 7 and 8 that new launches of pre-sale furnished homes enjoyed solid growth in the last five years while the home decoration industry has increased consolidation with a sharp drop in the total number of decoration enterprises. Exhibit 10 shows the penetration rates of key parts/materials required for decorative properties. There are still many industries with a low penetration rate and in the past were extremely small compared to the size of the Chinese property market. However, we believe they are emerging into a positive growth outlook and are becoming increasingly attractive as the latter slows down.
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