A 31% jump in holiday home sales has analysts calling a bottom for China’s battered real estate sector, with JP Morgan flagging a potential 20% upside in the near term.
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JP Morgan sees mainland property rally mirroring Hong Kong's 78% surge
A 31% jump in holiday home sales has analysts calling a bottom for China’s battered real estate sector, with JP Morgan flagging a potential 20% upside in the near term.
Coordinated bullish calls from JP Morgan and HSBC on May 7 are fueling hopes that mainland China's property market may be in the early stages of a recovery, after a 31% year-over-year surge in secondhand home sales during the May Golden Week holiday.
"The latest green shoots are in some ways hard to explain, at least with no obvious driver," said Karl Chan's team of analysts at JP Morgan in a May 7 report, suggesting an organic recovery may be taking hold.
The rally is being led by state-owned developers, which have seen their stocks rise 17% since April, while distressed counterparts are up only 2%. This contrasts with previous policy-driven rebounds where speculative buying sent troubled developers soaring. The Hang Seng Mainland Properties Index has gained 22% since early April, outpacing the broader Hang Seng Index's 4% rise.
JP Morgan believes mainland property stocks are only in the first of a three-stage recovery seen in Hong Kong, which saw a 40% initial surge. With mainland stocks up 22%, this implies a further 20% upside if the trend continues, with a crucial test of sustainability coming in the July-August data.
State-Owned Enterprises Lead a "More Real" Rally
This recovery shows a marked preference for stability, with investors favoring state-owned enterprises (SOEs) over privately-owned, distressed developers. Since the April low, state-owned property stocks have climbed approximately 17 percent, while their more troubled peers have managed a mere 2 percent gain. This is a stark reversal from past, policy-induced rallies, where distressed developers saw average gains of 278 percent, compared to 77 percent for SOEs. JP Morgan analysts see this as a sign of reduced speculation and the entry of "real money" seeking long-term value, suggesting a more sustainable "slow bull" market rather than a volatile "roller coaster." From a valuation perspective, state-owned developers are trading at a price-to-book ratio of about 0.63 times. A return to the historical average of 0.73 times would imply a 16 percent upside.
Investor Sentiment Shifts From Sidelines to Onshore
The nascent rally has been accompanied by a distinct shift in investor sentiment. While hedge funds were the primary buyers in early April, the past few weeks have seen increased interest from long-only funds in the U.S. and Europe. "The most-inquired-about stock is China Resources Land, followed by China Overseas Land & Investment (COLI) and Beike," the JP Morgan report noted. In a sign of growing confidence, some investors are reportedly rotating capital from Hong Kong property stocks to their mainland counterparts. Echoing this sentiment, HSBC's Head of Asia Real Estate Research, Michelle Kwok, stated in a same-day report, "Despite the rally, we think it is not too late to build positions." HSBC raised its price target for China Resources Land to HK$43.80, implying a 32% upside, citing the company's acquisition of a prime land parcel in Shenzhen.
This article is for informational purposes only and does not constitute investment advice.
