China Property - Improving Outlook With The Strong Liquidity Environment

1Q09 saw a sharp decline in commencement of construction GFA and land transaction volume — The recent 1Q09 real estate figures confirmed our view that the China real estate sector should see a year of destocking in 2009. In 1Q09 commencement of construction GFA and land transaction volumes declined significantly, by 16.2% yoy and 40% yoy respectively, although real estate investment recorded slight growth of 4.1% yoy. Commodity housing volume increased by 8.2% yoy to 11.3mn sqm, reversing the negative 0.1% growth in January-February 2009.

Improving market outlook with the strong liquidity environment — In 1Q09 the strong liquidity environment has acted as a critical factor for property market volume recovery. Total new net RMB lending in 1Q09 reached as high as RMB4.58 trillion, up 244% yoy, with the net increase in the household medium/long-term consumption loan (a good indicator for the incremental residential mortgage loan) reaching RMB195.4bn in 1Q09. This represented the strong increase in residential mortgage loans in the period, one of the key reasons for the strong rally in the property transaction market.

Key is future loan growth, favorable credit environment likely in remainder of 2009 — The Citi China Banking Research Team views that while severe tightening is unlikely (the PBoC has reaffirmed its loose stance following release of these figures), loan growth in April 2009/2Q09 should inevitably slowdown. If new lending falls from the RMB4.58 trillion level in 1Q09 to RMB1.0 trillion per quarter for the rest of the year (run-rate in 2Q/3Q08), system loan growth would be RMB7.6 trillion in 2009, implying 25% growth in loans outstanding. We believe the favorable credit environment could underpin growth in residential transactions, although volume growth is expected to slow down from the 1Q09 peak.

Focus on quality names such as COLI, Sino Ocean and CRL — In our view, the outlook for the China property market has turned bright. With recovery in transaction volumes expected to continue in 2Q09, volumes in 2009 will likely be better than in 2008. The China property sector has accumulated around 50% average share price growth in the past month. After the recent re-rating in the stock market, we believe investors should focus on stocks that present growth opportunities in the next 6-12 months. Based on this our preferred plays in the sector are COLI, Sino Ocean and CR Land.

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