Inventory may hold back prices of mainland real estate

Increased property sales, stabilising home prices, and aggressive land purchases by major developers all point to a positive outlook for the mainland real estate market, say property analysts.

But beneath the surface, they warn, lurks a hidden worry - sizeable inventories - which could emerge to derail improving sentiment next year.

According to a report from Nomura Equity Research released on Monday, month-to-date aggregate property sales were up 108 per cent year on year in 10 major mainland cities tracked, including Beijing, Shanghai, Guangzhou and Shenzhen.

"We expect another month of strong sales in November, meaning that our full-year forecast for nationwide sales (an increase of 2 per cent) is likely to be reached," said the report.

Jefferies Equity Research also noted an increase in primary home sales on the mainland, and in a report last week it said owing to the increase in new launches, developers broadly achieved strong presales in October, with 4 per cent month-on-month, and 54 per cent year-on-year growth.

"As of October, developers' presales grew 17 per cent year on year and locked-in 88 per cent of our full-year forecasts on average," it said.

The firm added that it anticipated that most major developers would achieve full-year targets.

An indication of the growing confidence in the market outlook among major developers was their increased activity in the land market in fourth quarter, with Jefferies noting in a report written by analyst Christie Ju that nine developers that the firm monitors had acquired six million square metres of land so far in the quarter for 16.6 billion yuan.

From October, leading players such as China Vanke, China Overseas Land and Investment, and Shimao Property were the most aggressive in land acquisitions, spending 6.2 billion yuan (HK$7.64 billion), 6.4 billion yuan, and 2 billion yuan respectively, it noted.

The average cost of the land acquired so far during the quarter was 3,015 yuan per square metre, up 23 per cent on the third quarter.

This was mainly due to the intensifying competition in the land market and developers' confidence in the property market for 2013, according to the report.

The sustained demand for homes saw home prices rise in 35 of the 70 cities monitored by the National Bureau of Statistics, versus declines in 17 cities, the Bureau reported on Sunday.

Nomura said the 70-city index was up 0.1 per cent month on month in October.

But it was down 0.6 per cent year-to-date and 1.2 per cent below the 2011 peak level. Nomura said that since some developers had already achieved their 2012 full-year sales targets by October it would not be surprised if they gradually cancelled price discounts or moderately lifted prices to further ease pressure on their profit margins.

However, some laggard players could continue to offer price discounts in order to prioritise inventory reduction, it added.

"On balance, we expect home price momentum to remain moderate towards end-2012," it concluded.

Alan Chiang Sheung-lai, head of the mainland residential property section for consultancy DTZ, agreed. "If you look at the performance of just the top 10 developers, it would seem market has stabilised. But they are the market leaders and the smartest players in the market, and there are still thousands of smaller developers who are suffering amid sizeable inventory level," he said.