Real Estate Developers-CRIC conference takeaway: Market to bottom in 2012

Too early to turn outright positive

We invited Mr. Ding Zuyu, Co-president of China Real Estate InformationCorporation (CRIC, Not Covered), to participate in a conference call withinvestors on Feb 28. Overall, he thinks it might be too early to turn outrightpositive on the property market. Key takeaways:1. Market to bottom in ‘12E; volume to drop modestly yoy: Mr. Ding expectsnational sales volume to drop no more than 10% yoy in 2012. He believes tier-1/major tier-2 cities with HPR should recover modestly from a low base, whiletier-3/-4 cities with high base last year will likely see yoy decline. Supply is alsohigher in those tier-3/-4 cities, which may exert pressure on developers' salesperformance near-term. On ASP, he still believes (same as last Nov) that priceswill bottom in Jun-Aug this year. On property investment, he thinks growth mayfall to c.+15% yoy (vs. +28% yoy in 2011) with new starts down c.10% yoy.

2. Policy stance likely stay stable; no substantial easing: Mr. Ding believesgovernment policy stance will stay stable (material easing unlikely) as long asthe market doesn't deteriorate further. On the other hand, he believes centralgovernment's tolerance for price recovery at this stage is still low and thus anysign of price recovery may trigger another round of tightening/policy reiteration.

3. Risk arising from commercial property/social housing: Mr. Ding is still morecautious on the commercial property market in Central & Western China andexpects there will be many uncompleted, empty commercial buildings in thecoming years in these areas as a result of heavy investment made in the past 2-3years that potentially outpaced underlying demand. On social housing, he thinksthe government should slow construction pace and complete the 36mn units in10 years or more, instead of the current targeted 5-6 years. Meanwhile, he alsobelieves social housing could be a potential threat to the commodity propertymarket in tier-1 cities, such as Shanghai, given the potential overlap of targeteddemand. Shanghai’s government recently substantially lowered the incomethreshold for households applying for social housing.

4. Developers’ sales performance to further polarize: Mr. Ding expects themarket shares of SOEs (i.e., CRL, COLI) and other leading developers’ (i.e.,Vanke) to continue to grow in 2012E. Most mid-scale private developers will nowfocus more on managing cash flow/profitability, instead of scale expansion. Midscaledevelopers (sales ranked in 30-50 nationwide) with high land investmentcost in tier-2/3 cities will face higher operating risk, in his view. First-moveadvantage and low-land cost is the key to survival in lower tier cities.