When assessing China’s property supply, the focus is typically on
inventory or property with pre-sale permits, which unfortunately do not
depict the real situation. A tear-down of total supply leads us to believe
that while there may be a short-term supply shortage (hence near-term
price pressure), there is sufficient supply to meet demand once supply
normalises. As such, the sector is a volume play, rather than a price play.
■ Property demand has recovered strongly year to date, but the supply
response has lagged. We thus expect supply shortages and short-term
price appreciation.
■ However, we do not expect this situation to last long. We expect supply
to normalise. In fact, we believe supply is already responding, with the
effects likely to be felt in the next six months.
■ Our analysis of various key cities shows that even if 2009 transactions
return to peak 2006/07 levels, which is possible, there will be sufficient
supply to meet the elevated demand once supply normalises.
■ Beyond the short term, we see limited scope for property prices to rise
and assume prices will stay largely flat this year. However, on a
relative basis, we see better price potential in Shanghai, Tianjin and
Chongqing in the longer term.
■ We believe investors’ strategy should be to buy the beneficiaries of
rising property volumes, instead of focusing on price appreciation
potential. In that respect, we like CR Land, which is now focussing on
asset turns, and E-House, the largest real estate broker in China. We
also like Hopson and Shimao.
When supply normalises …
A backlog of supply
As property demand dives and reported inventory surges during the property downturn, it
is logical that developers face a credit crunch and delayed property construction. However,
as demand recovers, the supply response lags, as evidenced by the sharp decline in the
proportion of properties (under construction) with pre-sale permits. This leads us to believe
that there will be supply shortages, hence the potential price appreciation in the near term.
Although supply lags, the response time is not huge, unlike a greenfield project, in our
opinion. With a backlog of properties still under construction, the supply response is
already underway as developers accelerate or resume construction of the existing projects
to get them qualified for pre-sale. Hence, as the supply side responds, we see the
proportion of properties (under construction) with pre-sale permits normalising to 25-33%
levels, instead of the current low single digits.
Near-term positive price outlook
With favourable macroeconomic conditions, including low interest rates and falling ASPs,
bringing affordability close to the best level since 1995, coupled with constructive
government policies towards the property market, we expect buoyant property demand to
remain at elevated levels and potentially exceed peak transaction levels in 2006-07.
Notwithstanding the demand surge, our analysis on supply from normalisation to
increment in various key cities suggests that there is sufficient supply to match demand.
This leads us to believe that any property price appreciation potential would be temporary
and limited. In addition, our analysis of individual city’s supply backlog relative to demand
suggests that Shanghai, Tianjing and Chongqing have a relatively stronger price potential,
although it does not indicate any near-term price trend.
But, as supply normalises ...
As a result, while the market will likely invest in the China property sector on the basis of
NAV expansion from potential property price appreciation and land bank acquisitions, we
believe the strategy going forward, as supply normalises, should be to focus on
developers that have a stated strategy to pursue volumes and the land bank acquisition.
As an overlay, developers with exposure to the Yangtze River Delta and Pearl River Delta
would also likely be relative winners.
To that extent, CR Land and E-House are our best plays. CR Land’s track record has
been good with arguably one of the strongest earnings potential, and management
indicating volume generation as its priority. Moreover, its recent capital-raising exercise is
positive, as this is the most explicit indication possible that the company is gearing up for
acquiring land bank, not to mention the 12% rise in free float. As the largest real estate
broker in China, E-House is also a prime beneficiary of the volume game. Its incentive
commission structure gives the company operational leverage to the improving property
market. Among the other stocks we cover, we maintain our OUTPERFORM ratings on
Hopson and Shimao and upgrade Greentown from Underperform to NEUTRAL.
Meanwhile, we maintain NEUTRAL ratings on Aoyuan, Guangzhou R&F and COLI.