What kind of Chinese property stocks should you buy?
A rapid surge in home prices in China’s largest cities has stirred worries over a speculative property bubble and a potential credit crisis, with the central bank and regulators mulling new measures to tighten lending policy for real estate to curb financial risks.
While policymakers struggle to control diverging home prices in different regions, analysts expect the government to continue providing policy support in smaller cities to revive the sluggish property market. But they caution against risks in investing in developers with high exposure to tier-one cities, which may suffer as a result of new tightening measures.
Property prices in Chinese cities have shown signs of divergence in the past month, with home prices in tier-one cities such as Shenzhen, Shanghai and Beijing soaring while remaining flat in smaller cities.
Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), acknowledged at a press briefing over the weekend that housing prices in some big cities have “gone wild” and “attracted considerable public attention”, after the government loosened monetary policies and relaxed mortgage rules to stimulate housing demand. He urged commercial lenders to stay vigilant and assess solvency and financial risks when extending loans to homebuyers.
Pan Gongsheng, vice-governor of the PBOC, said the central bank is working with other authorities, including the top banking regulator and the housing ministry, on a plan to crack down on illegal loans offered to homebuyers by property agencies, developers and online lending platforms.
“Property developers and agencies are not qualified to conduct financial business. They are illegally doing it,” Pan said.
“The financial products they offer, including loans for down payment, have not only increased the leverage of people’s home purchases, weakened the government’s policy controls and increased financial risks, but also added to risks in the housing market,” Pan said.
Property prices in tier-one cities are partly driven up by speculative buying, said Tony Tsang, an analyst for Deutsche Bank, adding that the speculation is supported by loans for down payments that are given out without collaterals.
In addition, such loans from developers and property agents have affected homebuyers’ expectations and may lead to further price increases, Tsang said.
As property prices have increased sharply in these top cities, the regulators are concerned about potential credit risks.
Tsang anticipates more tightening measures for tier-one cities but further relaxations in lower-tier cities.
Among the listed developers that may be hit by the tightening, Tsang named Beijing North Star, Sino Ocean, Yanlord Land, Sunac China, and KWG Property, which have a higher percentage of net-asset value in large cities.
“For these developers, potential damage from new tightening in tier-one cities are likely to offset the positive impact of potential loosening in lower-tier cities,” Tsang said.
Chen Cong, an analyst at Citic Securities, also said in a recent research note that the real estate frenzy in tier-one cities could prompt regulators to intervene. Possible cooling measures include increasing the supply and clamping down on illegal transactions in the second-hand home market, he said.
However, the authorities are expected to exercise caution and try not to suppress demand in large cities to pre-empt a policy mismatch between large and small cities.
“Nationwide, the bigger strategy is still clearing stockpiles of unsold property,” he said.
Overall, Chen is bullish on the property sector in the short term as he expects policymakers to continue rolling out favourable measures to stimulate the housing markets, including lowering down payment requirements, cutting banks’ reserve requirement ratios, replacing business tax in the property sector with value-added tax to help lower the tax burden, and offering further government subsidies on home purchases.
“There will be more (favourable policies), and sales may begin to heat up in most cities,” Chen said, “March may be a good window to increase positions in the property sector.”
He recommended shares of China-listed developers such as Poly Real Estate, Greenland Holding, Shenzhen World Union Properties Consultancy, China Merchants Shekou Industrial Zone and Taihe Group, among others.