Further tightening for mainland property market
Updated: 2011-01-27 06:59
By Peter Pak(HK Edition)
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In Tuesday's article, I discussed a few key factors for this year's outlook on the mainland property market, including the supply factor and affordability. I would like to move on to the policy front as well as relevant investment ideas.
Generally speaking, I do not expect the Central Government to ease its property-related policies in the short term, at least not until after the first half of 2011, as this would negate efforts over the past few months to curb property prices.
Policy pressure may ease in the second half of this year and onwards. If the housing starts during the period between the second half of 2009 through the first half of 2010 come to the market by the first half of 2011 as planned, I would expect some price adjustments, especially in cities where there is oversupply and low affordability. Pricing pressure could be exacerbated by the ramp-up of more social housing supply from the second half of 2011.
I also expect further monetary policy tightening for the property sector in 2011. This means fewer loans for developers, implying that they will need to fill the cash-flow gap with funds from other sources, such as property sales, especially deposits and advance payments. Amid increasing supply, developers will be under pressure to accelerate sales by lowering prices. The rise in 2010 real estate loans consistent with the increase in housing starts suggests higher supply in 2011.
For many listed property developers, such negative news flow might push sector valuations down by 5-10 percent from the current 40-60 percent discounts to net asset value (NAV), approaching the historical low of 80 percent discount to NAV in 2008. At such levels, and with the possibility of less policy pressure on the sector from the second half of 2011, a much more attractive entry point for property stocks is anticipated.
In terms of stock picks, there are five major criterions to measure. First, companies with land-bank exposure to cities with less supply. A few listed developers are mainly exposed to second and third-tier regions such as Guiyang, Nanjing and Hainan. These property markets only started to take off in 2009-2010, a couple of years later than first-tier cities. Also, many secondary market properties in these cities are rather old, and new developments have only accounted for a single-digit percentage of annual property demand since 2007. I see plenty of room for growth and do not anticipate a slowdown as in first and second-tier cities.
Second, companies with limited selling price downside risk. Some developers' average selling price (ASP) is estimated at 7,200 yuan per square meter for 2010 with the potential to record double-digit growth for 2011. Big developers with exposure to similar cities, on the other hand, are expected to post ASPs of above 15,000 yuan per square meter last year, suggesting less upside potential.
Third, sound financial health or easy access to funds. I like those firms with access to funds from its parent and whose net gearing is below the 70 percent level. The fourth criteria would be the ability to continue land acquisitions to support growth. Lastly, I would examine a company's ability to post market share gains through strong contracted sales growth.
Given the ongoing tightening measures and rising supply, I see opportunities for medium to large-sized players to grow even bigger, as their geographically diverse project portfolios should help mitigate policy risks and result in stronger cash flows as compared to smaller rivals. I expect industry consolidation to accelerate in 2011, as cash-rich developers take advantage of merger and acquisition opportunities.
The author is executive director of BOCI Research Limited. The opinions expressed here are entirely his own and do not represent BOCI or any other affiliated companies within the group. Nothing in this article constitutes an investment recommendation.
(HK Edition 01/27/2011 page2)