- Replacement demand is significant and is playing a greater role in property sales performance
- We estimate replacement demand in total amounts to c.50bn sm, a very meaningful amount vs existing stock but require sentiment to improve for full impact to be released
- Yuexiu, CR Land and Greentown rank highest for near-term sales resilience; Yuexiu, SZI and COLI are poised to ride on rising replacement demand
- Top picks: Longfor (960 HK), CR Land (1109 HK), COLI (688 HK) and Yuexiu (123 HK)
Replacement demand is significant, but it will take time to see full impact. The market has been debating on the significance of replacement demand on the physical market. Based on our analysis, estimated total replacement demand could amount to c.50bn sm. This is very significant compared to the existing residential stock of c.57bn and explains why regulators have focused policies on this front. Of this replacement demand, we estimate c.40% should have stronger desire to replace their homes due to their more-deteriorated building quality. The releasing of full impact from replacement demand will require overall homebuyer sentiment to improve.
Replacement demand already in play. We believe replacement demand should be refined into two components – homeowners with homes aged >20 years, and those completed between 5-20 years. Our analysis points to a meaningful +0.5 correlation between the portion of residential stock aged >20 years vs the monthly average sales growth in 31 provinces/cities in China, backing the claim of replacement demand playing a greater role in property sales (P.2-5 for details). The relationship reverses and turns negative as we run the analysis with newer residential stocks. Yuexiu, CR Land and Greentown China are the highest ranked given their larger land acquisitions made since 2021 in provinces that we identified having larger portions of residential stocks aged >20 years and should see stronger presales resilience.
Who is best poised to embrace the emerging trend? We believe replacement demand will assume an increasingly important role in the physical market going forward. We have therefore dug deeper on a city-by-city basis (P.X for details) and identified Yuexiu, SZI and COLI as best poised to benefit from rising replacement demand going forward.
Watch for entry points on quality names amid volatility. Near-term share price performance will likely remain volatile given the current fragile investor sentiment and may create decent entry points for quality names with sufficient quality saleable resources to outperform in this continually polarised market trend – Longfor (960 HK), CR Land (1109 HK), COLI (688 HK), and Yuexiu (123 HK).