The tide may be turning on China’s battered real estate market.

Investor confidence in the sector appears to be improving, as bond trading volumes and prices rose in recent weeks, in part boosted by the government’s promise to support the sector and some loosening of policies.

But analysts say China’s high-growth property market may be a thing of the past, set to be “changed forever” following the recent shakeup in the sector.

S&P Global Ratings said in an early April report that China’s policy crackdown on its residential housing market has “bottomed,” but that it will take several quarters for markets to feel the effects of the regulatory easing.

“When China’s residential market emerges from this correction, it may be changed forever,” S&P said. “We anticipate fewer developers will be able to employ the highly leveraged, fast-churn strategy that brought past success.”

Recent reports show that some cities and banks are willing to support real estate again after a plunge in home sales in the last few months.

Since March, due to weakening market demand, banks in more than 100 cities in China have lowered mortgage rates by an average of 20 to 60 basis points, Zou Lan, director of the People’s Bank of China’s financial markets department, told reporters Thursday.

He also noted how Covid had affected some people’s income and their ability to pay mortgages on time.

“The government’s stance [is] trying to prevent the contagion, preventing the spillover from the real estate sector spillover to the real economy,” Gary Ng, Asia-Pacific economist at Natixis, told CNBC in a phone interview earlier this month.

Any change in China’s real estate industry has significant implications for the economy since property and related sectors account for roughly a quarter of GDP, according to Moody’s. The latest wave of Covid restrictions has added pressure to growth that was already slowing.

“The measures may have been too tight. Now we see this fine tuning of the policy,” Ng said. “The worst time is over basically for those developers who are broadly in line with the current regulatory target or framework.”

The problems of real estate developers in China came to a head after the authorities rolled out the so-called “three red lines” policy in August 2020, aimed at reining in developers after years of growth fueled by excessive debt. The policy places a limit on debt in relation to a firm’s cash flows, assets and capital levels.

While many developers reduced their debt levels accordingly, a result of the policy was that banks became less willing to lend to the sector.

Against this backdrop, Evergrande, the world’s most indebted developer, fell into default for the first time late last year. As the debt crisis unraveled, other Chinese developers also started showing signs of strain – some missed interest payments, while others defaulted on their debt altogether.

The bond issuance in Asia’s high yield bond market, dominated by Chinese real estate developers, slumped in the first quarter of this year. The region issued only $4.4 billion worth of debt, about 85% lower than a year ago, according to data from Dealogic.

“This was a result of Chinese property developers largely being cut off from the bond market amid a growing number of stressed and distressed situations in the sector,” said Dealogic.

However, sentiment turned around slightly in mid-March after China signaled support for its companies, and indicated that authorities would work toward stability in its struggling real estate sector.

Bond trading volumes in the real estate debt market jumped to nearly $700 million in mid-March, a nearly 20% increase from over $583 million traded in the beginning of the month, according to data from electronic fixed income trading platform MarketAxess.

By late March, volumes increased further to cross $700 million, before falling back slightly again in April.

Bond prices also rose correspondingly. The Ice Bofa Asian dollar high-yield corporate index has climbed more than 15% in the period between mid-March to the beginning of April.

Three provinces have also loosened their policies, which include removing restrictions on home purchases for those without full local residency status — and that should lift short-term sentiment, said Nomura in a report on April 4.

“These policy relaxation measures are in line with our expectation and confirm the local governments’ increasing awareness and efforts to counter the rapid deterioration in the physical property market,” Nomura said, citing government data that sales across 30 major cities were down 47% year-on-year in March.

Natixis’ Ng said more large developers, especially state-owned ones, can buy land or acquire other real estate assets at cheaper prices now. He noted the firm’s analysis found that seven out of 10 land acquisitions year-to date were by state-owned enterprises, in a sign that the private sector was still struggling.

Earlier this month, developer Kaisa announced it entered a strategic cooperation with China Merchants Shekou Industrial Zone Holdings and China Great Wall Asset Management, both of which are state-owned. The agreement is set to include joint ventures and asset acquisitions, a Hong Kong exchange filing showed.

Despite the optimism, the situation ahead for developers could deteriorate further, according to analysts.

S&P pointed out that so far the policy relaxation has applied to the demand side, and not for supply of units.

“Supply may be limited even if homebuyer sentiment improves because funds are prioritized to complete presold homes and repay debt,” it said in a briefing last week. “Defaults will rise as [the] down cycle persists under the shadow of sluggish sales, [continued] narrower funding channels due to lack of confidence.”

The ratings agency said it believed that 20 developers are now facing a liquidity crunch – and another 4% could be at risk under the joint venture model.

Earlier this year, several developers announced they would not be able to release financial results on time.

Despite news of more support for real estate, Ng said Beijing’s tone remains focused on preventing speculation in the once-hot market, which means home prices aren’t going to increase that much.

As a result, companies that once profited from surging home prices are going to need to adapt, he said. “We will see developers not [be] able to repay their debt.”

The fundamental takeaway from recent developments is that China’s policy toward property investment has changed, the analysts said.

“Over the long term, policy will be guided by the principle that ‘housing is for living, not speculation,'” S&P Global said. “The new business models will, at least to some degree, need to fit that objective.”

Back in October, Eric Xin, managing director at Citic Capital, said at an AVCJ investing conference in Beijing that real estate will likely become a public utility so more people can afford housing in China.

“That’s why you see all the developers are in trouble, because utilities should be dominated by SOEs,” said Xin, also managing partner at Trustar Capital. “It shouldn’t be a big focus [of] capital. On the other hand, capital should go into innovation.”