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Why might property investment stay strong in the coming months?
Following our earlier discussions on China’s demand recovery, including Part 3: Embracing capex resurgence (published on 13 Mar) and Part 4: Consumption upgrade in T2-4 cities (16 Mar), we look into the property market in the fifth part of the report series.
We notice that property investment growth troughed at 1% in 2015, after an almost six-year slide; since then it has accelerated to 9.3% in 4M17, thanks to stronger sales in lower-tier cities and more proactive inventory build-up among major developers; this is largely in line with our view detailed in an earlier note(see: Why property investment may accelerate, 28 Oct 2016). Looking ahead, despite the reintroduction of policy tightening and less accommodative domestic financial conditions, we expect property investment to stay strong in the coming months, bearing in mind:
1. Resilient property sales: Nationwide housing affordability, as measured by disposable income vs. the mortgage payment ratio, stands at around 10-year highs, thanks to low mortgage rates, manageable nationwide price hikes and relatively high disposable income growth.
2. Lower property inventory: The 58-city inventory plunged 20% yoy in April; tier-1/2/3 cities’ inventory fell 27%, 22% and 15% respectively and their inventory month dropped to only 6, 8 and 11 months. The notable lower inventory is clearly positive for future investment.
3. Stronger land purchase: The NBS land transaction sales growth surged to 34% in Apr-17. In addition to resilient sales and low inventory, we think abundant liquidity, still relatively low funding costs and supply increase-focused policy may have also contributed.
4. Easier comparison base: In 2016, property GFA sales, new starts and investment growth all slowed visibly from the highs in April before speeding up again at end-3Q16, making an easier yoy comparison base for these indicators in the coming months.
What are the implications and what do we recommend?
Together with the strength in infrastructure investment, potentially strong property investment may continue to underpin domestic demand and prolong earnings recovery, especially for value-chain suppliers, including commodities (cement, coal, steel etc.), capital goods (construction contractors, excavators and heavy-duty trucks, etc.), durables (home appliances, autos, furniture, etc,), and financials (banks and insurance). See Figure 30~43 on page 12~14. We remain positive on Chinese equities and suggest overweight Financials, Energy and Industrials; we continue to prefer our top-10 picks (Figure 44).
20170605-Deustche Bank-China Equity Strategy：Why & How Demand Recovers Part 5.pdf
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