Summary
􀀗 Share and bond prices of Chinese property
companies have rebounded significantly from
their lows; transaction volume is also picking
up in various cities with most developers
recording an impressive y-o-y growth in
contracted sales in 1Q09. Has the China
property market bottomed?
􀀗 Transaction volume statistics from the
government are often distorted by policy
housing. Relying on transaction volume alone to
arrive at the conclusion that the China property
market has bottomed could be misleading.
􀀗 In this month’s overview, we perform an indepth
analysis of Shanghai’s residential
property market to look for clues on whether
the property market is out of the woods or we
should expect another leg down. Our analysis
covers only residential properties with an
average selling price greater than RMB10,000
per square metre to eliminate the distortive
effect of the policy housing data.
􀀗 We conclude that the sharp rise in transaction
volume in 1Q09 in Shanghai is driven by two
one-off factors, namely pent-up demand in
2H08 released to the market in 1Q09 and a
temporary favourable change in the supplydemand
dynamics, which leads to stable
property prices during the quarter.
􀀗 Stripping out the pent-up demand in 2H08
that was released in 1Q09, the transaction
volume for residential properties in Shanghai
rose by only 3% versus 1Q08 compared with
the 46% y-o-y growth using unadjusted 1Q09
sales data. Also noteworthy is that
incremental property transaction volume in
the high end of the market is lagging behind
that in the medium end.
􀀗 We expect headwinds to return to the
Shanghai property market with the destocking
reverting to re-stocking. On a
relative basis, we prefer developers with
exposure in medium-end residential property
projects given the higher inventory turnover,
as liquidity is of paramount importance.
􀀗 While we don’t have the raw data available to
perform an in-depth analysis of the residential
property markets in other Chinese cities, we
notice that a large portion (50% of floor area
and 30% of turnover) of the recent jump in
transaction volume in recent months is
attributable to policy housing in Beijing,
according to SOHO China. We suspect the
property markets of large Chinese cities
display a similar trend to that of Shanghai.
􀀗 We remain cautious on the property sector in the
medium term given potential risks, such as
looming offshore refinancing risk in 2010.
While further technical rallies are possible in
April 2009, we recommend investors to make

use of such a window to reposition their bond
portfolio. Our top sector picks remain Agile
Property and Road King Infrastructure, and our
least preferred picks are Shimao, China
Properties Group, Hopson and Shanghai Zendai.
Scrutinising the Shanghai
property market
Need we say it? The strong rebound in China
property stocks year-to-date has created hope that
the China property market has bottomed (see
Table 1). Indeed, since the introduction of
property relief policies by various local
governments and the central government –
particularly the loosening of the second home
mortgage policy with preferential mortgage rates
available and the 180bps cut in the greater than 5-
year best lending rate to 5.94% in January 2009
from 7.74% in October 2008 – we witnessed a
strong rebound in transaction volumes across
major cities in 1Q09 from the trough in 3Q08.
Figures 2 and 3 shows the monthly transaction
volume of residential properties in Guangzhou and
Shanghai respectively, of which the March 2009
transaction volume (in terms of number of new
residential property units transacted) is some 240%
and 150% off the trough in September to October
2008.
Has the China property market bottomed or
should we expect another leg down in China’s
residential property market? In this month’s
overview, we take a close look at Shanghai’s
residential property market for clues on the future
direction of the residential property market in the
city as well as the rest of the country.
Why Shanghai? First, Shanghai is one of the
better developed residential property markets in
China. There are various types of properties
available for sale, ranging from medium-end
properties to high-end apartments and luxury
villas. Second, all high-yield Chinese property
companies within our coverage universe have
exposure to Shanghai to different extents (see
Table 4). Most importantly, timely transaction
data are available in Shanghai Real Estate Trading
Centre’s website, which gives us access to
transaction statistics on a project-by-project basis.
Methodology
Before we start our analysis, we would like to
point out that publicly available headline
transaction volume statistics are subject to
distortion. In particular, transaction volume data is
often an aggregation of the transaction volume of
different property products, including subsidised
housing units. Given that the low-end or
subsidised housing market is not the focus of