China Property Investment Update:The other shoe drops

On 1 March, the General Office of the State Council issueddetailed measures to bring property prices under control(《关于继续做好房地产市场调控工作的通知》). The movefollows the “five new measures” announced by the StateCouncil (新国五条) led by Premier Wen. The 1 Marchmeasures include: (1) the PBOC requiring banks to strictlyimplement its differentiated lending policies while permittinglocal PBOC bureaus to raise downpayments and lendingrates for second-home loans, especially in regions withsurging home prices; (2) reiteration of the “20% personalcapital gains tax” levied on home transactions with properlyrecognized original values; (3) strict implementation ofHousing Purchase Restrictions in regions with surginghousing prices; and (4) expanded trials of the property tax.

The government’s detailed price controls are apredictable response to recent land market sales thatsaw housing prices surge, especially in tier-1 and -2cities. With the National People’s Congress looming,the government is keen to curb rising nationwideASPs and volumes. We do not rule out the possibilityof further announcements of measures at the locallevel that could include new curbs in the event of1) surging home prices; (2) rising property sales,especially in key cities, and (3) further “King Land”cases, a term now used to describe land sales fetchingrecord-high prices within regions marked by runawaydemand; and (4) surging land transaction costs.

Action. China property names are still liable to suffersome short-term volatility until late March after theNPC meetings have been held and large developersbegin announcing FY12F earnings. We look for majordevelopers to report solid earning growth in the25-30% YoY range on the back of strong 2012 sales.

In view of the policy risks involved, we recommendmass-market property developers with attractivevaluations (wider than a 30% discount to NAV), modestnet gearing ratios (c.60%) and ample land bank sizeslarger than 30m sqm). Developers matching thisprofile include: Country Garden (2007 HK,Outperform), CR Land (1109 HK, Outperform) andShimao Property (813 HK, Outperform). Property pricecontrols will remain an overhang in the short term.