China’s real estate sector has suffered a constant barrage of bad news over the past two years. But investors jumping into real estate stocks now — after a rare piece of good news — may have gotten ahead.
Shares of Chinese developers soared on Monday after data showed property sales jumping week on week. The number of real estate transactions in 30 selected cities increased by 43% compared to the previous week, according to data provider Wind. This shows that the recovery from the prolonged spring lockdowns in Shanghai and other cities is continuing apace: transaction volume is now at a similar level to roughly the same period last year. The Hang Seng Mainland Properties stock index rose 6.5% on Monday, although it was still more than halfway off its peak.
Pent-up demand likely contributed to the revival. It may take a while as buyers who were unable to buy an apartment during the depths of the pandemic restrictions finally come out. Investors are likely drawn to the sector’s cheapness – real estate stocks are trading at around two to three times expected earnings this year, although developers are also likely to cut their earnings forecasts, according to Nomura.
But it is still too early to tell if this is a sustainable recovery. On the one hand, the economy is still struggling and the job market, especially for the younger generation, remains sluggish.
A growing gap exists between housing markets in larger and smaller cities. So-called third-tier cities missed the latest jump in sales, with transactions over the past week still below last year’s level, according to data from Wind. House prices in first-tier cities rose 3.5% year-on-year in May, while those in third-tier cities fell 2.2%, according to government data.
This likely reflects the tight supply situation in major cities like Shanghai and Beijing. Finding new land to meet demand in densely populated megacities is an ongoing challenge. Small-town markets where many developers, especially currently heavily indebted ones, rushed to expand during boom days will likely find it much harder to recover.
The commodity market also seems to doubt a full recovery. Futures contracts for iron ore and coking coal – used to make steel – both fell around 11% on Monday. Prices for steel products also fell. The market seems to think that demand from a housing rebound or infrastructure stimulus may not be as strong as expected. Iron ore has now lost all of its gains so far this year.
Recent data on home sales represent a glimmer of hope for investors. But the real estate developer’s woes are not over yet.
Write to Jacky Wong at firstname.lastname@example.org
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