China’s real estate industry is facing significant challenges that need to be addressed promptly to boost GDP growth, according to a report from KKR. The real estate sector, which once accounted for a significant portion of China’s economy, has been struggling due to overbuilding and high levels of debt. The report suggests that the housing market correction in China may only be halfway complete, with both prices and volume needing to come under pressure for a full cleansing cycle to take place.
In response to the challenges in the real estate sector, Chinese authorities have been promoting high-quality development and emphasizing manufacturing. Policies have been implemented to provide financial support to select property developers, and some local governments have relaxed home purchase restrictions. However, the slump in the property market and a drop in stocks have caused foreign institutional investors to reconsider their exposure to China.
KKR expects a modest slowdown in China’s GDP growth this year and next, with real estate and Covid-related factors halving their drag on the economy from 1.4 percentage points in 2024 to a 0.7 percentage point drag in 2025. The report notes that while GDP growth is important, it is equally crucial for authorities to make it easier for businesses and households to tap into capital markets.
The report highlights that the consumer outlook in China remains strong, with middle to higher-income individuals spending modestly to upgrade their lifestyles. Consumer and services companies in KKR’s local portfolio are experiencing solid top-line growth, with consumers spending on items such as ‘smart homes,’ pets, and recreational activities. Retail sales saw a better-than-expected increase in January and February, driven by significant growth in Lunar New Year holiday spending.
Looking ahead, KKR believes that China has the potential to adjust its policies to be more investor-friendly, following historical precedent. While the report does not signal an all-clear for investors, it suggests that if China implements supply-side reforms and investor-friendly policies, the market could rebound significantly from its current levels. It emphasizes the importance of restoring confidence in the real estate sector and driving savings down to encourage consumers and businesses to spend on higher quality products.
