Shifting Sands: Unpacking the Divergence in China’s Real Estate Market - SOAS China Institute

//Shifting Sands: Unpacking the Divergence in China’s Real Estate Market

Shifting Sands: Unpacking the Divergence in China’s Real Estate Market

Photo credit: Riku Lu (Unsplash)

By Xiaowen Zhang, Jack Burnham and Ye Xue | 30 January 2024

China’s real estate sector has morphed from a nascent industry to a colossal entity in the past three decades, becoming a pivotal force in China’s rapid economic growth since the 2000s due to its intimate connection with consumers’ livelihoods and its extended industry chain. The sector witnessed a compounded annual growth rate (CAGR) of 9.2% in value added from 2012 to 2022, a surge that remarkably outpaced GDP growth over the same period. However, the underlying story of China’s real estate sector highlights a transition from the primacy of private firms to the steady rise of state-owned enterprises (SOEs).


The cyclical shift from public to private to public dominance once again over the past few decades can be highlighted by average sales figures and firms’ market share. While nimble and innovative private firms were initially able to rapidly capitalize on market opportunities, many have recently suffered from dramatically declining sales and low cash holdings, rapidly increasing their leverage. In contrast, real estate SOEs have experienced only mild declines in sales while maintaining their cash holdings. This trend has allowed SOEs to gain significant market share relative to their private competitors, with transactions conducted by state-backed firms constituting nearly half of total sales among the top 100 real estate firms over the first half of 2023. Moreover, in a 2023 measure of the comprehensive strength of real estate firms in China, six state-owned real estate companies, including China Real Estate Association, China Overseas Holdings Limited (COHL), and Poly Developments, were ranked amongst the top ten, a mild increase from the four listed in 2020.


The divergence between stated-owned and private housing companies is primarily the result of intricate interplay between market dynamics, policy shifts, and operational strategies. The brilliance of private real estate enterprises can be traced back to their relentless pursuit of expansion, which was driven by the industry’s intrinsic characteristics and competitive incentives. The industry’s vast capital demand over a lengthy duration, juxtaposed with firms’ limited equity capital, earmarked external financing as a pivotal resource for growth. This strategy was abetted by the wave of post-2008 economic stimulus and the 2010 directive to non-real estate SOEs to retreat from real estate, both of which unleashed financial resources once hardly accessible by private housing companies and augmented their arsenal for market competition. Coupled with uncertainty over the duration of dividends, these factors drove private real estate companies to opt for a high-leverage and turnover growth model. As measured by a sample of A-share listed real estate companies on Wind, year-over-year (YoY) growth rates for total borrowing by private firms reached 98.1% in 2010, while inventory holdings grew by 80% YoY during the period between 2010 and 2020, highlighting the torrid pace of expansion.


The aggressive growth of private real estate firms has also been driven by operational pressures to increase scale rather than enhance the ‘quality’ of growth. An analysis of the Wind data reveals that real estate transactions account for only half (53.8%) of private real estate firms’ total sales revenue on average, a trend epitomized by the recently delisted Sichuan Languang Development (蓝光发展). In addition, the rapid growth in accounts receivable increased the cost and pressure of capital recovery, while an increase in minority interests (少数股东权益) hindered firms’ capacities to control projects, signalling that such aggressive expansion has come at the expense of long-term soundness. This concern is bolstered by the stark rise in private firms’ sales, administrative, and interest expenses, all of which significantly outpaced those of SOEs between 2010 and 2019. Moreover, the mismatch in the duration of investment and debt presents another potential risk, as the period between 2010 and 2019 also saw private firms aggressively pursue short-term borrowing while eschewing long-term bank borrowing and payable bonds, a precarious scenario given the long-term capital occupation nature of the real estate industry.


In contrast, the narrative of state-owned real estate companies has been one of relatively prudent conservatism. With their close sovereign ties, SOEs are subjected to more administrative constraints and have broader mandates tethered to a range of socioeconomic objectives, leading to a more pronounced focus on stable operations rather than solely gaining market share. In contrast to private firms, SOEs were nudged towards enhanced efficiency and more conservative practices following the 2010 directive (“退房令”) for non-real-estate-focused SOEs to withdraw from real estate business, which inadvertently drove weaker state-owned players out of the market. Beyond influencing market operations, these conservative practices also extended to administrative costs, with both executives and employees of real estate SOEs witnessing moderate salary growth relative to their peers. As a result of this strategy, state-owned housing companies experienced a rise in average operating income in 2011, a stark contrast from the private sector during the same period.


As the collapse of the private real estate sector has threatened to harm consumer spending, social stability, and the viability of long-standing policy objectives, SOEs have emerged as the unequivocal choice for achieving the interim objective of “ensuring housing delivery” and are poised to play a vital role in stabilizing the real estate market and mitigating its negative ripple effects within the broader consumer economy.


The deterioration of the real estate industry in 2023 has generated significant anxiety amongst Chinese citizens, dampening their willingness to consume, fuelling protests, and threatening the government’s political standing. Even in Shanghai, one of the wealthiest cities in China, falling real estate prices have eroded consumer confidence and placed significant strain on municipal tax revenue while hindering economic growth. Moreover, the latent social and political consequences of the real estate crisis should not be underestimated. Private real estate firms, entangled in a financial quagmire, have left a trail of unfinished projects, threatening social stability amidst China’s challenging economic recovery. In 2022, widespread ‘loan freezes’ in central and southwestern China prompted conflicts between homebuyers and local governments, highlighting popular discontent over authorities’ management of the crisis. The collapse of the real estate industry also threatens the government’s aspirations to achieve “common prosperity” and insulate the economy against external shocks, as incomplete housing projects could potentially wipe out generational household wealth while eroding consumer confidence.


However, due to their operational and financial prowess, healthier cash flow, and continued access to external capital, SOEs have retained their capacity to effectively manage the crisis. Aided by their implicit endorsement from the government, SOEs have emerged as a trustworthy alternative to private builders, particularly in an environment in which buyers have become increasingly risk adverse. Moreover, these firms’ practice of proactively acquiring land, coupled with their substantial financial muscle, underscores their potentially pivotal role in stabilizing the market and safeguarding the government’s economic objectives amid China’s ongoing urbanization drive. Following Chinese authorities’ encouragement of SOEs and healthy large-scale private companies to take over high-quality projects from financially distressed firms, some private real estate companies are now actively seeking strategic cooperation with state-owned firms. In 2022, Guangdong’s government was reportedly facilitating potential cooperation between state-owned and private real estate firms, including Aoyuan Group, R&F Properties, and Yuexiu Property. Nonetheless, it is important to note that even while state-owned enterprises might be a positive force in restoring market confidence in the short term, their chronic inefficiency still presents potential long-term challenges, painting a complex and dynamic portrait of the future of China’s real estate sector.

Xiaowen Zhang completed her PhD in Finance from the University of Alberta. She currently serves as a Post-doctoral Fellow at the China Institute of the University of Alberta. Her work primarily focuses on China-Canada investment and trade, as well as corporate finance, with a particular interest in corporate investment, governance, and institutional investors.

Jack Burnham graduated from the Max Bell School of Public Policy at McGill University with a Master of Public Policy (MPP). He currently serves as a Policy research associate at the China Institute of the University of Alberta. Jack has previously worked at the NATO Association of Canada as a Junior Research Fellow writing for the Centre for Disinformation Studies, and his primary research interests include defence policy, great power competition, and US foreign policy in the Indo-Pacific region.

Ye Xue holds PhD from the University of Sydney. His research focuses on non-Western IR theory, China’s rise and international order, Chinese foreign policy, and China’s political and social development. Before joining China Institute, University of Alberta, he was a teaching fellow at the Department of Government and International Relation the University of Sydney. Also he was research associate at Lowy Institute, and the Australia Centre for China in the World at Australian National University.

The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.