China Property Investment Update:Rising ASPs and robust upgrade demand in Beijing

On our recent two-day trip to Beijing, we visited projectsbeing developed by Beijing Capital Land (2868 HK, NotRated) and spoke with Vice Chairman Mr. Hu Weimin aboutthe city’s latest policy developments. The major concern of Mr. Hu and other developers is the possibility Beijing willimpose even stricter price controls that will drive up the costof high-end projects. Another concern is that the vice mayormay demand approvals for presale permits. In themeantime, our channel checks indicate ASPs in Beijing arestill rising on robust housing demand that recovered10-15% from early May.

Tightening price controls in Beijing are no different from thesituation in other key cities. Like many developers, BeijingCapital Land is encountering problems such as stricterchecks on presale permits that are causing launch delays,especially for projects with ASPs that are 15% higher thansurrounding projects. Yet housing demand for upgradedproducts is still very strong, especially for projects withlarger unit sizes in close proximity to good schools. Anexample is the Peninsula International project located onthe border of Tianjin and Beijing. Beijing Capital Landregistered a 90% sell-through rate for the latest launch of150 of the project’s villas. In the case of luxury projects suchas the well-known “Xanadu” development of Beijing CapitalLand located in the eastern part of Beijing’s CBD, it iscommon to launch a new phase directly after completion soas to avoid price checks. This allows the developer to setprices at market rates.

Action. We continue to favor mass-market players withdiversified land bank portfolios and product lines.

Developers with business models emphasizing high assetturnover will find themselves relatively more protected fromtightening price controls. Our top picks within the Chinaproperty space are CR Land (1109 HK, Outperform) andShimao Property (813 HK, Outperform). Premium homebuilders are encountering price controls and furthertightening, which could lead to stock price corrections in theshort term. Even so, we are confident that premium homebuilders like SUNAC China (1918 HK, Outperform) andGreentown (3900 HK, Outperform) will flourish in themedium- to long-term based on robust demand for premiumand upgraded products in key cities.

Risk. The possibility of additional property controls,including trials of the proposed property tax, remains anoverhang in the short term.