Divergence Between Cities Widening; Recovery Deferred By Lockdowns.
3M22 property FAI slowed to +0.7% yoy, new construction starts slumped to -17.5% yoy
while land transacted area declined 41.8% yoy. The gloomy market outlook coupled
with tight liquidity conditions are hurting appetite for land acquisitions. 3M22 home
sales value slumped 25.6% yoy and home inventory shrank 2.64% mom, partly
attributable to the slower pace of new project launches. Sporadic lockdowns may defer
the housing market’s recovery in core cities to 2H22. Maintain OVERWEIGHT.
WHAT’S NEW
• 3M22 property FAI slowed to +0.7% yoy; new construction starts tumbled to -17.5%
yoy. 3M22 property FAI slowed to +0.7% yoy, the second lowest in history after 1Q20.
New construction starts/completions further slumped to -17.5%/-11.5% yoy. Developers’
tight liquidity condition has yet to ease, and total funds raised by developers in 3M22
declined by 19.6% yoy (2M22: -17.7% yoy). Contribution from sales deposits/mortgage
loans slumped by 31.0%/18.8% yoy while contribution from domestic loans also further
declined to -23.5% yoy. Recent credit easing measures aimed at injecting liquidity to the
sector seemed to be insufficient and benefitting only selected developers.
• Land transaction area declined 41.8% yoy. 3M22 land transaction value/area declined
by 16.9%/41.8% yoy. Recent centralised land auctions continued to be dominated by
SOEs, but we are seeing more private developers like CIFI and Longfor returning to
participate and successfully acquiring a few plots of land. Local governments are
gradually easing some of the terms and also allowed a higher project margin, mainly by
relaxing selling price restrictions and some removed the requirements to compete on
affordable housing construction and self-holding ratio. Land premiums have also edged
up to about 5% compared with about 3% in the previous two rounds of land auctions.
• 3M22 home sales fell 25.6% yoy; unsold new homes surged 14.2% yoy. 3M22 home
sales value/volume were -25.6%/-18.6% yoy. According to China Real Estate Information
Corporation (CRIC), Top100 developers’ 3M22 property sales have further slumped to –
47% yoy. Though home sales have yet to bottom out, the slowdown in developers’ pace
of new project launches has caused home inventory to shrink by 2.64% in Mar 22.
According to CRIC, inventory months for Tier 1/2/3 cities as of Mar 22 continued piling up,
last reported at 13.73/19.61/22.95 months, +65.0/+84.4%/+126.4 yoy
• Decline in new home prices moderated to -0.07% mom. New home prices continued
searching for the bottom in Mar 22 and have fell for the seventh consecutive month. 70-
city new home prices was down 0.07% mom (Feb 22: -0.13% mom) with 38 cities
reporting mom decline (Feb 22: 40). Tier 1/2/3 cities reported +0.35%/+0.04%/-0.22%
mom changes and were +4.33%/+1.64%/-0.63% yoy as of Mar 22. Note that the
secondary home prices for 47 out of 70 cities being monitored by National Bureau of
Statistics (NBS) are currently lower than the price level a year ago, as these cities are
under pressure to come up with more measures to stabilise their local housing market. In
our view, the downtrend in Tier 3 cities is unlikely to reverse in the near term even with
the rising frequency of policy easing and weak rigid demand. The longer duration needed
to digest existing unsold inventory will remain the major constraint to local home prices.
ESSENTIALS
• Policy easing extended to relaxation of home purchase/sales restrictions among
Tier 2 cities. Marching into Apr 22, we are seeing a growing number of Tier 2 cities
stepping up policy easing by relaxing their home purchase/sales restrictions which was
kick-started in Zhengzhou in Mar 22. More Tier 2/3 cities are expected to follow up with
the easing of: a) home purchase restrictions, b) home sales restrictions, c) mortgage loan
restrictions (eg lowering downpayment ratio), and d) home ceiling prices. We opine that
not all of these cities relaxing restrictions will lead to a meaningful recovery of property
sales. Though the intensity of policy easing does make a difference, what’s important is
the core fundamentals of the local housing market eg population growth, local economic
condition and unsold inventory level. Majority of the cities that came out with aggressive
easing measures were those with high inventory levels.
• Divergence between cities widens. The divergence in the local housing market has
further widened. According to CRIC, Top32 cities reported an average sell-through rate of
35% in Mar 22. Only five cities (Shanghai, Hefei, Taizhou, Hangzhou and Suzhou)
reported above 60% sell-through rate with the highest being Shanghai at above 90%,
while Nanjing, Wuhan, Foshan and Wuxi all reported average sell-through rate of below
15%. Homebuyers especially in lower tier cities are turning more selective; developer’s
reputation, project location and project selling prices are playing important roles since it is
now the buyer’s market.
• Effectiveness of recent easing of measures. To gauge the effectiveness of the recent
easing of measures on stimulating the local housing market, we focus on the mom
change of their home sales volume and new home prices in Mar 22. It is worth noting that
February has always been the low season for property sales, and the rebound of property
sales in March was partly contributed by seasonal factors; the easing of measures may
also need a longer duration to show its full impacts. Policy easing measures may not
necessarily lead to immediate market recovery; the market may respond differently based
on their respective market conditions and demographic profile.
• Zhengzhou. Zhengzhou’s new home transaction (units) spiked 46% mom in Mar 22, but
new home prices have slid 0.7% mom. Some developers were seen exploiting the
sentiment recovery in the city to clear inventory on hand by offering steep discounts, also
not to forget the city’s unsold home inventory was rather high at 32.35 months.
• Nanning. We are seeing a gradual recovery in Nanning’s local housing market; the city’s
Mar 22 property sales rebounded 72% mom while the decline in new home prices has
also moderated to -0.1% mom (Feb 22: -0.4% mom).
• Fuzhou. Fuzhou’s April month-to-date average daily home sales (units) were still 10%
lower than 1Q22’s average; new home prices as of Mar 22 have slumped 0.6% mom. We
also saw lacklustre demand from developers in Fuzhou’s first centralised land auction last
month.
ACTION
• Maintain OVERWEIGHT on the property sector. We have yet to see the introduction of
major easing policy from the central government since the Financial Stability and
Development Committee called for an effective plan to resolve and prevent risks in the
property sector on 16 March. Momentum of the recent rally in the sector has started
fading but we think the valuation recovery of SOEs and selected private developers will
be sustainable, though they could be moving sideways before we see more catalysts in
the sector (eg announcement of new measures to stabilise the housing market, lifting
existing lockdown measures and recovery of property sales).
• Given the widening gap between higher tier and lower tier cities, we think that it is unlikely
to see “one size fit all” easing measures from the central government. “One City One
Policy” could be the norm going forward; lower tier cities will continue stepping up the
intensity of easing measures to stabilise the local housing market. We do not expect any
major policy changes (except monetary easing) in higher tier cities which are backed by
strong rigid demand since the relaxation of existing restrictions could again spur
speculation activities. Impacts of the recent COVID-19 lockdown were temporary, home
demand in Tier 1/2 cities are only being deferred. More efforts are needed to stabilise
market expectations and stimulate market demand in order for us to move out from this
vicious cycle (lack of confidence in homebuyers, unwilling to enter the market, inventory
continuing to pile up, developers continuing to slice selling prices given their tight liquidity
condition). Monetary easing (eg lowering mortgage rate and easing loan restrictions) itself
may not be sufficient.
• We maintain BUY on CIFI with a target price of HK$6.27, derived from a 40% discount
to its estimated NAV of HK$10.45. We like CIFI for its: a) high exposure to Tier 1 and 2
cities (81% of Rmb360b 2022 saleable resources), b) relatively low refinancing risk with
access to capital market, and c) aggressive expansion of recurring income base which
could compensate the declining profitability of the property development segment. The
recent issuance of convertible bonds weighed on investors’ sentiment but note that this
implied relatively low refinancing risk for the company, not to mention the additional
HK$588m convertible bonds were also issued at premium and oversubscribed by two
times. Management was being conservative and utilised the opportunity to raise additional
liquidity under the current challenging and uncertain environment.