• More policy relaxations down the corner, likely focused on the liquidity front in a controlled manner
  • Buyer sentiment remains subdued, with gradual improvement expected
  • Land supply and new starts will unlikely regain lost ground and could potentially translate into a supply shortage in 2022
  • Watch for entry opportunities on quality names with better capability to acquire land – COLI (688 HK), Logan (3380 HK), CG (2007 HK)

What’s New

We recently hosted a call with industry experts from Soufun for their views on the cooling physical property and land market since the start of 2H21. Key takeaways of the call are below:

More relaxations around the corner, with support mainly on the liquidity front… The supportive policy stance from PBOC and China Banking and Insurance Regulatory Commission (CBIRC) in late Sept sets the tone for further policy easing, as evidenced by relaxations on the mortgage and policy fronts in cities like Foshan, Guangzhou and Harbin. Majority of the relaxations so far are generally supportive policies on the liquidity front (i.e. release of mortgage quota, acceleration of mortgage disbursements, relaxations over the usage of housing provident funds, etc). Future easing are expected to follow along the same lines as what we have seen in Harbin.
…but likely in a controlled manner. The government’s broad policy stance of “houses are for living in, not for speculation” is still the overall direction. Other aspects of the existing policy restrictions (e.g. price caps, purchase restrictions) are likely to remain largely unchanged, while banks will still be subject to the regulatory caps over mortgage and property related loans. We believe the chance of a potential overdose in policy relaxation and thus a sharp rebound in market sentiment is low. 

Buyers are staying on the sidelines for now, but sentiment may improve upon further release of mortgage quota. Current market sentiment is relatively weak, with first-time homebuyers staying on the sidelines due to their sensitivity to price fluactuation, while upgrader demands are restrained by mortgage avaliability and an inactive secondary market. Gradual support on the liquidity front (including the potential release of mortgage quota) in more cities is expected to unleash demand and lead to some stability in the physcial market. 
A cooling land market led to lower average land premium to base price and slight profit margin improvement. With surging liquidity risks and continued pressure to deleverage, developers – particularly privately owned enterprises (POEs) – have been conservative in the 2nd concentrated land auction. This is partially evidenced from the rise in bought-in ratios from an average of 5% in the first batch to 30% in the 2nd batch that have been completed so far, alongside a 12ppt decline in average land premium to base price (see chart on pg.3 for details). Thus, project margins appear to have slightly improved in the recent batch of concentrated land auctions.

Slight improvement in participation rate may be seen for the upcoming 3rd round of concentrated land auction. This would be driven by 1) potential improvement in the liquidity environment upon policy leniency offered by local governments; 2) 3rd batch will generally be launched towards the end of the year, which means that the bulk of the land premium would be paid in 2022, having less financial impact on developers’ year-end balance sheets; and 3) local governments have started approaching selected developers on their future land supply requirements to assess demand for upcoming land parcels after seeing the surge in bought-in rates in the 2nd round of concentrated land auctions. 

Land supply and GFA new starts unlikely to regain lost ground in 4Q21. In 9M21, residential land transacted in 300 cities fell 24% y-o-y in GFA terms as per CREIS database, in part a result of a 3-4 month delay in the 2nd batch of concentrated land auction. With rising bought-in ratios and subdued developer incentives for land acquisitions, land supply is unlikely to see a meaningful pickup in 4Q21. We note that national residential GFA new starts also fell by 3.3% in the same period as a result of delayed land supply and increased pressure on liquidity and capital. Given limited signs for improvements on both fronts in 4Q21, we anticipate residential GFA new starts to continue to fall. 

Delay in the 2nd batch of concentrated land auction and falling GFA new starts should lead to supply shortage in 2022. On one hand, the 3-4 month delay in the 1st and the 2nd batch of concentrated land supply auctions as well as the shortfall in GFA new starts will naturally translate to supply shortage for 2022, as the gap is too wide to be compensated by faster asset turnover. Additionally, most developers that participated in the 2nd round were state-owned enterprises (SOEs) whose asset turnovers are on average slower than POEs, and thus the period of supply shortage could well be longer than the delay of 3-4 months in the concentrated land acution.

Physical market to remain subdued, growth in GFA sold may remain in negative territory up to 1H22. Policy is expected to be more lenient but it would generally be done in a controlled manner and focus primarily on the liquidity side in the near term – i.e. actual support to the physical market should be limited. Buyers are generally staying on the sidelines despite developers’ increasingly aggressive price promotions and would wait until the dust in the physical market settles and there is more clarity on the policy front. The supply shortage stemming from delayed land acquisitions and sluggish new starts will likely start to be seen from 4Q21. With a high comparison base for both 4Q21 and 1H22, this indicates that the physical market may remain under pressure, with potential improvement expected from 2H22 onwards on the assumption that major policy direction remains unchanged.

SOEs currently are in a better position, but POEs should not be deemed irrelevant. The China Real Estate Association has recently held a meeting to collect feedback and recommendations from industry players following the recent developments in the sector. Invited participants were a good mixture of developers of different backgrounds (i.e mix of POEs and SOEs), exposure and financial strength. As a result, regulators are likely to consider the circumstances of POEs in determining future policy direction. While SOEs are currently better positioned given their generally healthier balance sheets and better access to funding, POEs should not be taken out of the picture at this time. 

Gradual stabilisation in market sentiment to drive share price recovery. We share the view with the experts that policy risks on the sector should have reached a peak, and the likely introduction of further policy relaxations will help to calm investor sentiment and support valuation recovery. Near-term, we expect share prices to remain volatile. We recommend that investors look out for entry opportunities for quality names with sound balance sheets, with capacity for land acquisitions in preparation for the potential rebound in the physical market in 2022 – COLI (688 HK)Logan (3380 HK), and CG (2007 HK).