Apr 09, 2012 06:07 PM IST | Source: CNBC

Investors grow confident of soft landing for China property

Property prices in China have fallen for five consecutive months, but in a strange twist the stocks and bonds of Chinese property companies have been rallying this year, as investors grow more confident the sector will see a soft landing and avoid a major bankruptcy.

Investors grow confident of soft landing for China property

Property prices in China have fallen for five consecutive months, but in a strange twist the stocks and bonds of Chinese property companies have been rallying this year, as investors grow more confident the sector will see a soft landing and avoid a major bankruptcy.

The Shanghai Composite`s property subindex has gained nearly 12% this year, outpacing the 5% gain in the broader index.

Anita Yadav, managing director at the corporate bond brokerage and asset management firm SJ Seymour Group says high-yield property bonds have also rallied over the past three months and spreads aren`t as wide as they were late last year.

"Till end of last year the expectation was that there were going to be some bankruptcies, but by January this year, we realized that, yes, the market was bad, but it wasn`t going to be so bad," Yadav told CNBC.

In a report issued last month, Standard Chartered also pointed out that there were signs of hope after the drumbeat of negative news last year. "Apartment sales have improved since the Lunar New Year break," Lan Shen and Stephen Green wrote. "Developers are a little more confident about apartment sales, and price cuts of 10-20% are apparently helping to nurture demand."

On Friday, China`s largest property developer Vanke seemed to confirm a rebound, reporting a 24% increase in sales in March over the previous year. It was the second consecutive month Vanke had reported a year-on-year sales increase.

But Marc Faber, who`s been extremely bearish on China`s economy, says investors should be cautious and not read too much into recent signs of an uptick in real estate.

"I don`t think that the property market is recovering, it`s just not going down anymore, and they discounted prices and so it`s like the first drop in the share market and then there`s a rebound and then it drops again," Faber said on the sidelines of Maybank`s Invest Asia conference in Singapore.

"I think this is what`s happening in China. People say, ok, now the price is lower we`re going to buy."

Smaller vs Bigger

Some credit analysts are also warning that the sector faces judgement day as builders struggle to pay back debt. On Thursday, Standard and Poor`s cut the credit rating on Hopson Development and Glorious Property.

"We have to remember, ratings agencies are not the leading indicators, ratings agencies follow the market," says SJ Seymour`s Yadav.

According to her, the best thing for investors to do is to choose the bigger names, which have exposure to mass-market housing and projects outside the large tier-1 cities. She recommends the corporate bonds of Evergrande and Country Garden.

"We reckon the bigger players, simply because of the bigger number of projects, the diversification, will assist them. The smaller players can come under pressure very quickly," says Yadav.

Meanwhile, analysts expect further consolidation among the smaller developers. Donald Han, Senior Advisor, HSR Property Group said his firm was advising some of these smaller companies.

"A lot of these companies by in large have a fairly strong asset bases in terms of balance sheet but the difficulty is trying to move sales and converting that into stronger liquidity," Han told CNBC. "Some of the smaller companies may go through consolidation. The result of the consolidation exercise would turn some of the new entities into a bigger more stable companies."

Copyright 2011 cnbc.com

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