Property first off the blocks as China’s economy rebounds  

Sector is being re-rated by equity analysts, and credit markets are embracing property bond deals and bigger players expect to see volumes in the physical market that exceed last year

by Umesh Desai
Property first off the blocks as China’s economy rebounds  
Chinese homebuyers look at housing models of a residential property project at a real estate in Huai'an city in eastern China's Jiangsu province in May 2019. File photo: Zhou Changguo / Imaginechina via AFP

(ATF) China’s property sector has hit the ground running as the world’s second largest economy becomes the earliest to make a recovery from the coronavirus pandemic.

The sector is being re-rated by equity analysts, and credit markets are embracing property bond deals and bigger players will see volumes in the physical market exceeding last year’s total.

“The China property physical market is performing well and we have seen a level of recovery here unseen in other sectors of the Chinese economy, some of which are dotted with landmines,” said Agnes Wong, head of Asia Credit Strategy & Trading Desk at BNP Paribas. “We see strong pre-sales in 2020 in which large players will exceed last year’s levels.”

The gross floor area (GFA) of residential land sold in 100 major Chinese cities in Jan-April was 155.5 million square metres, close to the 157.3 million sqm in the same period last year, according to Fitch Ratings. This was driven by 30% year-on-year growth in April, which amounted to GFA of 60.5 million sqm and ended three consecutive months of contraction.

Surge in transactions

“The surge in residential land transactions is attributable to homebuilders’ land-replenishment needs that were deferred from 1Q20. Meanwhile, local governments pushed forward land sales due to falling tax revenue,” Fitch ratings analysts Shuncheng Zhang, Adrian Cheng and Jenny Huang said in a note.

The trend remained unchanged in May according to property analysts at independent research firm CreditSights.

“37 out of the 40 developers we track recorded higher contracted sales in May compared to April, reflecting a continued monthly recovery from the Covid-19 situation in February,” they said in a note.

In the top 70 cities, 57 showed home price improvements.

“The home price index for Tier-1 cities climbed 0.7% month-on-month, compared to 0.2% month-on-month in April. Separately, the home price indices of Tier-2 and Tier-3 cities gained 0.6% and 0.7% month-on-month respectively, compared to 0.5% and 0.7% respectively, in April, they said.

Easy monetary conditions and strong credit markets have allowed a surge in bond offerings in the hard currency market with investors also raising their recommendation.

“China property remains our preferred exposure in high yield. Focus on good quality BB rated bonds that have sold off, as well as shorter-dated bonds. April sales were better than the market’s toned down expectations,” said Min Lan Tan, head of the Chief Investment Office at APAC, UBS Global Wealth Management.

Meanwhile, equity analysts have upgraded the sector with Jefferies & Co analysts going overweight on the sector.

Analysts Stephen Cheung and Calvin Leung said broadly there were three positive factors behind this rating change – strong 3Q sales backed by rich launches and low base, 1H FY20 results to beat the market's low expectations, and potential nationwide credit easing to benefit the sector with lower borrowing costs.

“Given the delivery delay due to Covid and the high base of several major developers, the market has low expectations for 1H20 results. We expect developers overall to report decent interim results (~10% earnings growth on average) that will likely beat market expectations, though with significant divergence,” Jefferies analysts said in a note.

Bullish stance

They continue their bullish stance for the third quarter, on the back of abundant new launches, better buyers' sentiment and lower base.

“We expect major developers to deliver 15-20% sales growth on average. In particular, we believe mid-cap developers should continue to outperform with double-digit percent sales growth in 3Q,” they said.

But with so much money chasing the sector, valuation could become an issue and investor indigestion may set in.

“The only concern we have for the sector is valuations which are looking toppish and some don’t appear to resemble high-yield levels any more. Even though we have seen a flurry of issuance, I don’t see supply as a problem, as it will be capped by NDRC quotas,” BNP’s Wong said.