China Property Sector: Will full policy relaxation in Tier 2 cities help?
- Our scenario analysis suggests only limited improvement in the physical market upon full policy relaxation in Tier 2 cities
- Recovery in sentiment in the physical market is now beyond supportive property policies
- Sustainable rebound will only materialise when RMB depreciation stabilises, physical market recovers, and refinancing channels reopen
- Sector picks: COLI (688 HK), CR Land (1109 HK), Yuexiu (123 HK), KE Holding (BEKE US/2423 HK)
Full relaxation in Tier 2 cities will offer limited support to the physical market.
The market is expecting more policy easing to kickstart a recovery in the physical property market, with a full relaxation for Tier 2 cities seen as one of the more powerful options in the policy toolbox. Setting aside the likelihood of this taking place after the recent policy developments, we believe the market may have overestimated the impact of this move. Our scenario analysis, which assumes sales in Tier 2 cities in the remaining four months of this year recovers to the level in Sep-Dec 20 (+25.1% y-o-y vs Sep-Dec 21) upon a full relaxation in the city tier, would only help to narrow the decline in sales in FY22F to 22% (see pg 2 for details). This would be towards the upper range of our current expectations of a 20-25% sales decline for 2022F.
All eyes on the 20th National Congress.
We believe property specific policies alone may be insufficient to reignite the physical market. Homebuyers are staying on the sidelines not only due to weak property price expectations and delivery risk, but also the rising uncertainty in China’s economic outlook. We expect policy support to remain controlled and gradual, with a mild pick up in the physical market in 4Q alongside a possible increase in project launches. A potential near-term inflection point may come from the upcoming 20th National Congress to be held from 16 Oct. Key points to watch would be the government’s stance on zero-COVID policy, stimulus plans, RMB outlook, and tone towards developers and the property sector.
Stay with quality names.
Investor sentiment remains fragile. We are only likely to see a sustainable recovery in share prices in the property sector when the RMB stabilises, physical market recovers, and refinancing channels reopen. We recommend investors to stay with quality names that are less impacted by RMB depreciation and able to benefit from the potential release of more policy supports– COLI (688 HK), CR Land (1109 HK) and
Yuexiu (123 HK). We also like Beike (BEKE US/2423 HK) which would benefit from the ongoing demand shift to the secondary market.