What We Think Of The Big Rally in China Real Estate Stocks

Property developers' latest rebound lacks firm ground, but key state-owned developers shares attractive

Jeff Zhang, CFA 8 October, 2024 | 2:18PM
Facebook Twitter LinkedIn

China Bull

We think the recent buying frenzy in China real estate names was induced by incremental policy easing and investors' reignited sentiment, rather than a rebound in durable home demand.

While policy relief has lifted home sales in select key cities, this may be short-lived as home price weakness will likely persist amid oversupply. We also believe that new directives will pose a limited impact on less wealthy cities, given their already loosened homebuying curbs. As such, we reiterate our view that nationwide new home sales value and prices should stabilize in mid-2025 as excess inventory is absorbed, and maintain our fair value estimates for our China property sector coverage.

Although the share price rally has led to overpricing on companies such as China Jinmao and Vanke, we still see valuation upside for large state-owned developers including China Overseas Land & Development and China Resources Land. Both names remain our preferred sector picks given their better asset quality and stronger balance sheet.

The additional policy tailwinds mainly comprise: 1) reducing the first- and second-home down payment ratio to 15%-20% across China; 2) removing buying restrictions in top cities like Guangzhou; and 3) raising the central bank's funding mix for inventory destocking to 100% from 60%.

These measures boosted new home sales by over 20% year on year in Tier 1 and Tier 2 cities during the national holiday in October 2024, as per the China Index Academy. That said, the longevity of demand recovery remains clouded by subdued home prices, and lower-tier cities require longer cycles to see meaningful improvement, in our view.

For home supply, despite a slow start in unsold unit absorption, we expect local governments to expedite the buying process in the coming months. This will be driven by more clarity in funding sources and developers' acceptance of further deep discounts to project values. Consequently, we anticipate China's home inventory to moderate from 2025 onward.

Food For Thought From Expert Voices

Sign up Now

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
China Jinmao Holdings Group Ltd1.04 HKD1.96Rating
China Overseas Land & Investment Ltd13.24 HKD0.91Rating
China Resources Land Ltd22.75 HKD1.56Rating
China Vanke Co Ltd Class H6.14 HKD1.49Rating

About Author

Jeff Zhang, CFA  Jeff Zhang, CFA is an Equity Analyst at Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures