China Developers Sentiment Index (CDSI) fell dramatically to 48.7 in H2. This marks a reversal from 55.3 — a seven-year high and the strongest first-half mark — set just last year. This downturn is indicative of an expanding gap in developer appetites for risk, especially between tier one cities and their tier two/three/council-adopted neighbors. Standard Chartered recently surveyed real estate professionals to help shed light on what’s really going on in the market. It shines a light on both the challenges and opportunities that developers are encountering across various tiers of cities.
The CDSI for Tier 1 cities jumped to 72, a signal of extremely high levels of optimism among developers in these major urban centers. In comparison, Tier 2 cities kept a robust index of 57.9, indicating optimism was still booming. Tier 3 cities experienced a significant decline, with the index crashing by more than eight points month-over-month to a three-year low of 35.9. This drop is largely due to anticipated slowing sales, lower prices, and less overall construction.
Tier 1 and Tier 2 city developers are still generally hopeful about the potential for sales to pick up in the latter half of this year. An overwhelming 60% of developers surveyed expect sales to increase. That recent burst of optimism is the result of surging popular demand for green building retrofits and energizing policy initiatives. In addition, they forecast optimism for increases in new home prices.
“Our proprietary semi-annual China Developers Sentiment Index (CDSI) edged down to 48.7 in H2, after registering a seven-year high of 55.3 in H1. The survey indicated a greater divergence in developer expectations between higher-tier and lower-tier cities. The headline CDSI for Tier 1 cities jumped to 72 and that for Tier 2 cities stayed high at 57.9. Meanwhile, the CDSI for Tier 3 cities slumped to a three-year low of 35.9 on expectations of falling sales, prices and construction activity.” – Standard Chartered economists
Participants in the survey indicated that only builders located within these Tier 1 cities have any plans to step up new starts. Additionally, they are trying to maximize construction zones for the remainder of the year. Their appetite for land acquisition has dulled at each of these city levels mainly because of budgetary limitations on spending. Almost 30% of the developers we surveyed said they have already been approached by acquirers about these unsold home buyout markets.
Developers in Tier 1 and Tier 2 cities are still upbeat. They are up in arms about what’s happening with home prices on the secondary market. Nearly seven in ten of all respondents think these prices are going to drop. The months of inventory was flat throughout the first half of the year. Builders anticipate we may see a continued deceleration in the second half.
“On the supply side, only developers in Tier 1 cities plan to increase new starts and construction area in H2. Land acquisition appetite weakened across city tiers mainly due to financial constraints. On the demand side, 60% of surveyed developers in Tier 1 and 2 cities expect an increase in sales in H2, supported by upgrading demand and policy measures. While new home price expectations remain positive among Tier 1 and 2 city developers, nearly 70% of all respondents expect secondary-market home prices to fall.” – Standard Chartered economists
Even with good credit conditions, developers have raised the alarm about a possible future tightening in available financing. The share of respondents anticipating additional easing of credit conditions has fallen sharply since the first half of this year. Though we might see a relaxation in bond financing through H2, off-balance-sheet lending just got a lot harder to come by.