China’s real estate sector has suffered a bad news in the past few years. But investors jumping into real estate stocks right now – after a rare piece of good news – may be already way ahead of themselves.
Shares of Chinese developers jumped on Monday after data showed property sales jumped from the previous week. According to data provider Wind, the number of real estate transactions in 30 selected cities has increased by 43% from the previous week. That shows a recovery from extended spring lock Shanghai and other cities are continuing to grow rapidly: trading volume is now at about the same level as at the same time last year. The Hang Seng Mainland Properties stock index rose 6.5% on Monday, although it is still more than half of its peak.
Pent-up demand probably contributed to the renaissance. That could drag on for a while as buyers unable to purchase apartments during the depths of the pandemic restrictions are finally being resolved. Investors are perhaps drawn to how cheap the sector can be – real estate stocks trade at around two to three times this year’s expected earnings, although developers also have likely to reduce their profit guidance, according to Nomura.
But it is still too early to say whether it will be a sustainable recovery. First, the economy is still struggling and the job market, especially for the younger generation, remains sluggish.
The disparity is widening between the housing markets in the largest and smallest cities. So-called tier three cities missed out on the most recent sales growth, with transactions last week still lower than last year, according to data from Wind. House prices in tier-one cities rose 3.5% year-on-year in May while house prices in tier three cities fell 2.2%, according to government data.
That probably reflects the tight supply situation in big cities like Shanghai and Beijing. Similar to other densely populated megacities, finding new land to meet demand is a long-term challenge. Smaller city markets, where many developers – especially debt-ridden developers – rushed to expand during boom days could be much more difficult to recover from.
Interestingly, the commodity market also seems to cast doubt on a full recovery. Futures for iron ore and coke – used to make steel – were both down about 11% on Monday. Prices of steel products also fell. The market seems to think that demand from recovery in real estate or infrastructure stimulus may not be as strong as expected. Iron ore has now lost all gains year-to-date.
Recent home sales figures show a glimmer of hope for investors. But the real estate developers’ woes are far from over.
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