Monday 22 October 2018

Outlook for Chinese property uncertain

Surging home sales in Beijing and elsewhere have driven valuations of China’s listed property firms
Surging home sales in Beijing and elsewhere have driven valuations of China’s listed property firms

Bloomberg News

Nothing divides analysts in Asia quite like the outlook for Chinese property companies, and that's turning their shares into some of the region's most volatile investments.

The split between optimists, who tend to focus on surging home sales, and pessimists, who worry about high debt burdens, has rarely been so big: Chinese developers now have three of the five widest share-price target ranges among Asian companies with a market value exceeding $1bn (€808m).

If you believe the most bullish analysts, China's major listed property firms will be worth $596bn (€482bn) in a year. Listen to the bears, and you get a forecast of $304bn (€246bn).

It's no wonder the stocks have been so turbulent. Sunac China Holdings Ltd and Future Land Development Holdings Ltd, which have the two widest price-target gaps in Asia, both recorded bigger fluctuations than 98pc of the region's large-cap stocks over the past 200 days. In just the last six months, Sunac has posted three peak-to-trough swings of at least 20pc.

While the gyrations have made it more difficult for market observers to assess the health of one of the global economy's most important sectors, they've also provided plenty of trading opportunities to anyone with a strong opinion about where China's real estate industry is headed.

"Both bulls and bears have a fairly big say," said Lee Wee Liat, an analyst at BNP Paribas SA in Hong Kong, who sides with the optimists on large developers including Sunac and Country Garden Holdings Co. "Such a big division makes property stocks very volatile."

Lee cited several reasons for his upbeat outlook: soaring land values, buoyant demand for homes in China's third- and fourth-tier cities, an industry consolidation that favours the largest players, and a unique pre-sale system in China that lets developers reap cash before finishing construction.

Those tailwinds helped spur big gains in Chinese property stocks last year, and they've also shown up in annual reports that the companies have released over the past few weeks.

The four largest Chinese developers by sales increased net income by more than 150pc on average in 2017, according to data compiled by Bloomberg.

The results haven't been strong enough to sway sceptics, who say developers have taken on too much leverage to weather rising borrowing costs and government curbs on property speculation.

China's real estate industry has some of the country's highest net debt-to-equity readings, with Sunac's ratio exceeding 200pc, according to Citigroup Inc.

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