No hard landing for Chinese real estate

April 10, 2012

The desperate days when Chinese property developers offered free cars as an inducement to homebuyers look to be over.

Sales and earnings figures indicate some of the gloom is lifting as developers have enjoyed a second straight month of rising sales. Vanke, China’s biggest developer by sales, said last week that March sales had risen 24 percent year on year, while  2011 profits rose 30 percent. Another firm, China Overseas Land, posted a 21.5 percent profit rise last year.

The mood is reflected in stock prices. While the Shanghai shares index has risen less than 5  percent this year,  a sub-index of Chinese property companies has risen 13 percent. Shares in Vanke and COL are up 13 percent and 22 percent respectively. A Reuters poll of fund  managers showed that investors had upped their weighting for property stocks to 10.9 percent at the end of March, the highest level in two years.

The share rally has continued even though the government has dashed hopes it will soon wind down its two-year campaign  to bring down property prices.  It has also bucked a broad housing market slowdown (home prices fell for the fifth straight month in February) amid signs that Chinese authorities are unlikely to provide the economy with any further stimulus. Analysts at Citi said in a recent note:

Developers’ comfort under current tightening (policy) and confidence in a stable outlook suggests the toughest time for China’s property sector is over.

For a long time, the country’s real estate market — and the possibility of a crash there — has generated fear in the minds of China-watchers. That danger is by no means over — economic growth is cooling but inflation remains high. Companies too have warned that tough times still lie ahead.

But many such as Karine Hirn, Shanghai-based chief representative of asset manager East Capital, have never believed in an outright property sector collapse. China has an 80 percent home ownership rate and 25 million people work in construction, she points out. Real estate accounts for 13 percent of China’s GDP. So it is unlikely the government would ever have risked a property price crash. Hirn also points out that while sales in cities like Beijing and Shanghai are indeed slowing sharply,the market remains robust in Tier-3 cities — home to over half of China’s urban population.

As I wrote here last week, anyone who believes in the China  story will find share valuations fairly attractive these days. That seems even more true for property stocks —  they trade around 7 times  12-month forward earnings — compared to over 20 times back in 2007 and around 11 times just a year ago. Hirn of East Capital says they are trading at a 45 percent discount to net asset value (NAV is a reflection of the market values of real estate properties held by a company).

East Capital, which manages 240 million euros in Chinese equities, has increased holdings of China Overseas Land and China Resources Land. Property stocks now comprise 6 percent of the China portfolio, up slightly from 5.2 percent at the end of last year.

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