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  • Homebuyer sentiment may see some recovery in Nov after the introduction of several supportive policies in the monthPhysical market may continue to fall by >20% in Nov given a high comparison base
  • Growth in residential GFA new start hits historical low, showing more signs for a supply shortage in 2022
  • Sector picks: COLI (688 HK) and CG (2007 HK)

Physical market to post >20% decline in Nov. National residential sales in Oct-21 fell by a further 24% y-o-y upon a 24% decline in residential GFA sold and flat residential ASP. Both 1st and 2nd hand residential price index of 70 key cities posted the 2nd consecutive m-o-m decline. These were led by 1) homebuyers staying on the sidelines awaiting clarity on the up-and-coming property tax pilot and developers’ liquidity and refinancing risks; and 2) a high comparison base. While the softening in policy tone and leniency on the liquidity side has been stronger than expected, and more policy support should be on the way, we believe it will take time before they come to play. We expect Nov will likely post >20% y-o-y decline given a high comparison base. 

Growth in residential GFA new starts hits historical low. Residential GFA new starts extended its declining streak for the seventh consecutive month in Oct-21, reporting a record low of -34% y-o-y, bringing the YTD decline to 7% as land acquisition activities by developers remained in a halt upon surging liquidity risks. Residential RE investment in Oct stayed in negative territory, falling by 3%. Supply shortage for 2022 is increasingly apparent.

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Most developers may miss presales targets. In Oct-21, weighted average presales growth of 29 developers we track remained lacklustre at -22% y-o-y. This brought YTD presales growth to 10% with a target lock-in ratio of 77%. We believe most developers will miss their presales targets, as the sector will need to record at least 16% presales growth (weighted average basis) in Nov-Dec 21 to meet targets. This looks challenging given the high base for the two months.

Gradual stabilisation in market sentiment to drive share price recovery. With the physical market showing more signs of cooling and a stronger-than-expected turn in policy direction, we believe the sector should have passed its toughest period and further downside risk on valuations should be limited. The likely introduction of further policy relaxation will help to calm investor sentiment and support valuation recovery. We recommend investors to watch for entry windows in times of near-term share price volatility for quality names. We prefer those with a sound balance sheet and capacity for land acquisitions to underpin future presales growth – COLI (688 HK) and CG (2007 HK).