Mainland property stocks dumped as home sales fall

PUBLISHED : Wednesday, 28 September, 2011, 12:00am
UPDATED : Wednesday, 28 September, 2011, 12:00am

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Mainland property stocks have dropped to record low valuations as investors pulled out of the market amid fears that the revenue and earnings of developers will be hit hard by falling sales.

For buyers of bricks and mortar on the mainland, rather than shares, the question is whether stock investors have got their forecasts right.

Will property prices on the mainland fall sharply during the remainder of the year and continue their slide next year or can a hard landing be avoided?

Before the stock market began trading yesterday, the Shanghai Property Index was at a three-year low - down 50 per cent from its high in July 2009 and 19.7 per cent from this year's peak in April. The index tracks the performances of all property shares on the Shanghai Stock Exchange.

The Shanghai Composite Index was also at a three-year low, but at a less steeply 30 per cent from its high in July 2009 and 20 per cent from its April peak.

By the close of trade yesterday, both indices were little changed.

At its present level, the property index is at a price-earnings ratio of 9.9 times, against 69 times at its peak in August 2007. The composite index's PE ratio is 11, compared with its peak of 37 times in October 2007.

The Hang Seng Property Index has a PE ratio of 10.7 times, against 26 in January 2008.

At these levels, the valuations of property stocks - and therefore the market's sentiment about property sales and prices - had fallen back to the lows last seen during the sector's trough in 2008, said Alan Jin, the head of regional property research, excluding Japan, at Mizuho Securities Asia.

'The market is in a state of panic at the moment because of expectations of continued policy tightening over the next 12 months, a looming price war caused by rising inventory, and liquidity concerns that are combining to drag down even the sector's titans,' Jin said.

The sell-off has left no property stocks unscathed. China Vanke, the country's biggest developer, yesterday closed at 7.17 yuan (HK$8.73), down from a 52-week high of 10.09 yuan after reporting a 12.6 per cent drop in sales last month - its first sales decline in more than a year.

Developers listed on the Hong Kong market fared no better. China Overseas Land & Investment closed yesterday at HK$11.88 - down 29.03 per cent from a month's high of HK$16.74 on September 1. In the same period, China Resources Land fell 29.47 per cent, Country Garden Holdings dropped 37.98 per cent and Evergrande Real Estate Group shed 36.65 per cent.

The mainland property stocks Mizuho covers are trading at a 60 per cent discount to net asset value, close to the 63 per cent discount they reached in the 2008 trough, Jin said.

'Similarly, the rolling 12-month forward price-earnings ratio is only 7.2 times, slightly higher than their 2008 trough of 6.5 times,' he said. 'Even if a disaster scenario plays out, where both volumes and prices decline by 20 per cent, the downside risk is 15 per cent on average.'

For property prices, Jin said the market's pricing of listed developers suggested most investors were already expecting housing prices to decline.

'But housing price declines alone cannot explain the big dip,' he said. 'Panic probably is the key reason for market overreaction ... the same as in many other crises.'

The slump also reflects the gloomy outlook for the global economy, risks of debt defaults in the euro zone and fears that liquidity in the property sector may be drying up.

Lee Wee Liat, the regional head of property at Samsung Securities, said the sell-off in property shares raised a real concern that investors were expecting a repeat of the 2008 collapse of the property market.

If that were to happen, Lee said, property prices and transaction volumes in major cities could simultaneously collapse by up to 25 per cent and 38 per cent, respectively.

At present levels, investors were pricing property stocks at 2013 forward earnings ratios at the lowest point reached for PE levels in the 2008 financial year, he said.

Jin said he expected developers' cash flows to come under pressure towards the end of the year.

On a 12-month horizon, Mizuho is more positive than other brokerages on sector fundamentals, on the back of potential policy loosening, compelling valuations and strong underlying demand.

However, there are always bears in the market.

'We have noted that sales volume during the first three weeks in the traditional 'Golden September' in 11 major cities disappointed the market, with no improvement compared with August and largely underperforming sales in the same period last year with an average drop of 35 per cent year on year,' said Philip Tse, an analyst with ICBC International Research. 'We have seen that the impact from policy austerity has emerged and the tightened credit environment has worsened homebuyers' sentiment,' he said in his latest research report.

Given the government austerity measures, stressed cash flows, and downward pricing pressure, developers are facing their biggest ever challenges in the next six to 12 months, the report said.