More Market Oriented in 2009. The State Council announced at its latest
meeting that it would implement further policy easing for the property sector.
This delivers a strong message about the central government’s determination to
revive the real estate market. We see the latest moves as a positive driver for
the property market to become more market oriented.
􀂄 Further policy easing ahead. In addition to several recent positive policy
changes for the property sector, we expect further policy easing and support in
2009, as mainland developers have recording mixed recent sales results. Sales
volumes rebounded strongly in November 2008 in some cities/provinces,
mainly due to policy easing. The effect was not across the board though, with
sales in some cities rebounding less than expected.
The central government is well aware that the property sector is an important
contributor to economic growth, and we expect further supportive policy to
improve market sentiment. This could include: 1) fiscal and monetary policy
moves, such as further rate cuts, or tax rebates for homebuyers from local
governments; 2) further policy easing for second-home purchases (which were
partly eased at the State Council meeting).
􀂄 Tough times for weak players; the strong to benefit from policy stimulus,
M&A opportunities in 2009. We don’t expect China’s property sector to
rebound significantly in 2009, due to a slowdown in economic growth. The
consensus forecast is for GDP growth of around 8% in 2009, a big comedown
from most people’s previous expectations of continued double-digit growth
(especially after urban disposable incomes grew 17.2% in 2007 and 12.1% in
2006).
The worsening economy has resulted in concerns about job and income
security. Given the current global economic slowdown and internal credit
tightening since 2007, many manufacturers and corporations have started to
lay off employees or even close down. (China’s November PMI dropped to a
record low of 38.8, well below the level of 50 that is the tipping point for an
economic slowdown).
Moreover, before 2008 most homebuyers or potential buyers expected the
value of their properties to continue rising. This meant buyers preferred to
purchase early to avoid price increases. However, expectations have been
lowered after a year of property-sector slowdown. Buyers now realize that
property prices are not guaranteed to rise indefinitely, and that factors such as
location, quality and type of property will have a major influence on price.
High-quality developments in prime locations offer greater value, and houses
offer greater value than apartments as supply is limited.
So despite the recent announcement of policy easing, we do not expect
property prices to surge in 2009, due to the weaker economy and substantial
leftover inventory from 2008. We expect many property developers with tight
funding situations to sell these properties at the current market value to ease
their finances.
Even so, we believe policy stimulus will attract homebuyers to the market, as
lower tax payments, transaction charges and interest rates effectively give a
discount to house prices. We expect this demand to help stabilize prices in
most urban areas and the sector to start to emerge from this trough.

In particular, we see sales recoveries and market-share expansion for the stronger
developers in 2009, as:
1. Mid- to high-end developers should capture upgrade demand, as they have
properties in prime locations or urban areas. These include COLI (688.HK),
Shimao (813.HK), Sino-Ocean Land (3377.HK), KWG (1813.HK),
Guangzhou R&F (2777.HK) and Greentown (3900.HK).
2. Easing credit controls should benefit developers of small- or medium-sized
units, as the new policies are mainly aimed at buyers of these properties.
(Larger and stronger developers have more exposure to these types of unit.)
Beneficiaries are likely to include those in the previous point, plus Agile
(3383.HK) to a lesser extent as its properties are a bit far from prime
locations.
3. The government is expected to give more financial support to strong,
established developers for M&A. These include COLI, Sino-Ocean Land,
Shimao and KWG.
4. The government has indicated there will be more loans available to develop
small- or medium-size units, but these are only for construction. As such,
small developers with weak finances, such as Shanghai Forte (2337.HK),
are expected to complete their current projects, but are unlikely to draw up
new plans as they have less scope to buy more land for future development.
􀂄 Small and weak developers with limited funding will likely benefit less from
policy stimulus, and we expect stronger players to squeeze their market shares,
and perhaps even force them out of the market.
􀂄 We therefore see stronger and better-financed developers putting even more
distance between themselves and their weaker rivals in 2009. Developers with
sufficient funds should be able to further expand market share by acquiring
projects from smaller players or those with insufficient funds to complete their
projects.
􀂄 They will have strong bargaining power because of the fragmented market and
because of the tight finances for many developers following credit tightening since
late 2007.