Interview: China Property Beating Bourse In Beauty Contest

WITH CHINESE STOCKS enduring a sustained slump, pouring money into real estate has become an increasingly attractive option for PRC investors looking for higher returns, a sector expert told Asia Fund Space.

Mr. David Yang, Research Analyst, UOB Kay Hian, recently maintained his "Market Weight" for Hong Kong-listed property plays, saying that the recent surge in land prices in certain core cities has become a hot topic in the sector and he thinks this is driven by the robust liquidity available to developers and "heated" primary sales in those cities.

However, he added that soaring land prices raise the possibility of both liquidity and policy tightening, and it is also a potential risk to the sector and will have an underlying impact on developers' profitability.

He said soaring home prices have become a major risk to the sector and will have an underlying impact on developers' profitability, and he therefore prefers companies that have disciplined land acquisition strategies and healthy balance sheets, such as China Resources Land (01109).

He also likes developers such as China Overseas Land & Investment (00688) and Sunac China (01918) which stay out of the irrational competition in the open market and pursue M&As at more reasonable prices.

Asia Fund Space:  Amid the sustained bear market in the region, are properties seen as more attractive investment alternatives than stocks?

Or are investors still worried about the unpredictability of macroeconomic policy targeting the housing sector that can shift at any time?

Mr. David Yang, Research Analyst, UOB Kay Hian:  Yes, and we have seen since June 15 of last year that home sales in China have been rallying after the A-share market crash.

People realize the fact that in China purchasing home units is a more reliable way to make money as we are under such a loosening credit environment (money printing continues and mortgage rates are at historical low level).

Asia Fund Space:  For 2016, do you expect the government to be more concerned about the residential or commercial property sector and why?

And which one will possibly be targeted for more regulations?

Mr. David Yang:  Actually, authorities want the residential market to continue its hot performance which leads to higher land sales income and tax income.

But soaring ASPs in core regions lead to a potential crash and that's why they released tightening measures in Shenzhen and Shanghai.

For commercial property, the oversupply issue in most cities (except in SH, BJ, SZ) also raises their attention, but commercial property is not effect normal people's living. Thus, it's not a priority for the government.

Asia Fund Space:  There has been recent big business news including talk that Huawei might be planning to vacate Shenzhen for another city to save on property and labor costs as well as reports that outsourcing behemoth Foxconn laid off some 60,000 workers in Kunshan to be replaced by robots.

How much of an impact are you seeing on property prices and sentiment due to major news items like these?

Mr. David Yang: I think news like this is more related with the enterprise level instead of normal people.

And our ground feedback is minimal on this in terms of ASP.

He added that land markets, especially in core Tier II cities such as Nanjing and Suzhou, have seen strong performances YTD in terms of volume and prices.

In the January-April period, land premiums soared 122.5% year-on-year in Tier II cities and accounted for over 70% of total value nationwide, and land prices in Tier II cities also surged 77.3% on average, given strong primary home sales leading to much more intense competition among developers.

"Robust liquidity conditions and strong sales in those core cities which led to replenishing demand are the major drivers for the heated land markets, and proceeds from pre-sales and home mortgages also rose 34.4% and 54.7%, respectively as a result of credit easing in the housing market.

"Soaring land costs in core cities will lead to policy tightening, which is negative to the sector, and in Suzhou, the price cap on land costs has appeared again to cool the market and there are rumors that the city will implement home purchase restrictions (HPR) to curb price growth."

(Note: This story is contributed by Andrew Vanburen. Mr. Vanburen has served as a
government official focused on international trade at the American Institute of Taiwan in
Taipei, and worked in financial journalism for nearly a decade in both Beijing and
Shenzhen. He holds a Master's Degree from New York University. He is currently Director at
Hong Kong-based Asia Fund Space. For more information, please visit:
www.asiafundspace.com)