Are China’s Falling Property Prices Hurting Luxury?

Index Moves is our monthly analysis of the biggest climbs and drops on The Jing Daily KraneShares China Global Luxury Index, which tracks the global market performance of the luxury sector. The Index relies on the Jing Daily Global Luxury Score and Jing Daily Brand Awareness in China Score in addition to fluctuations in market cap and stock closing price. Below, we highlight luxury brand moves for the month ending October 31, 2021. The latest official data on China’s property market shows the first month-on-month decline in new home prices since 2015. Such data wouldn't have previously concerned the luxury industry, but not now. Today, property and luxury are intertwined like never before, and investors are worried. The data shows prices of new properties in China fell by 0.08 percent across 70 cities during September. Goldman Sachs says it has registered a 0.5-percent decline on an annualized basis. This decline clearly hit home buyer sentiment across the country, as existing-home sales dropped by 63 percent compared to the year prior, according to Nomura Holdings. This drop was small but enough to curtail spending from China’s middle classes. In October, China’s Purchasing Manager Index (PMI) fell to its lowest level this year, and retail data has been sluggish since August (figures for October have yet to be published). But why does this affect luxury companies? For the simple reason that China’s middle classes are now the biggest consumer group for many luxury brands. Household wealth in China has grown consistently since the country's last property slump, jumping 5.4 percent in 2020 alone, according to the Credit Suisse Global Wealth Report (that was largely thanks to a rising real estate market). A fall in property prices could, therefore, have the opposite effect. “This housing price could really have a mid-term impact as peoples’ wealth could change intangibly, and they won't have that good feel-good factor, and that will definitely have an impact on sentiment to spend,” says Ling Xie, an equities analyst on luxury goods at Credit Suisse. The companies on the Jing Daily KraneShares China Global Luxury Index — many of which sell mainly to the middle classes like Anta Sports — performed poorly in October. On the flip side, however, brands selling to the affluent performed well over the month, lifting the Index back to highs not seen since mid-September. The companies that finished the month in the top-three places — Moncler, Richemont, and Hermès — all happen to sell the most expensive products. All three companies reported higher sales than analysts expected in their recent third-quarter results, with a healthy increase in sales to China. Their share prices rallied following the news, and the Jing Daily KraneShares China Global Luxury Index steadily increased. But China’s property problem could get worse. Evergrande has been joined by smaller companies like Kaisa in missing or using a 30-day grace period to make bond repayments. If repayments continue to be missed or delayed by these companies, the wealth management products they issued could directly hurt the affluent and middle class. And that is why investors are worried. Several months after Evergrande first indicated that they were struggling to meet their many body repayments, including the 3.5 billion it owes in offshore bonds that are expected to mature in March 2022, there is little evidence the Chinese government will intervene in the property market. Without such state aid, the fall in prices could continue until it affects China’s wealthiest. Without them, even the most expensive products will struggle to sell.

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Are China’s Falling Property Prices Hurting Luxury?