China Property Investment Update:Softer, gentler property curbs

The Political Bureau of the CPC Central Committee held itssemi-annual economic meeting on 30 July, formulatingpolicies and setting the tone for China’s macro-economicdevelopment in 2H. Two clear priorities came to light:(1) greater support for the “new urbanization” initiative, and(2) lowering expectations for the housing market to ensureits healthy development (促进房地产市场平稳健康发展).Our interpretation of “healthy development” is very gradualor sluggish growth of China’s housing market, implying aslower increase in housing prices, particularly in tier-1cities.

At past CPC Central Committee meetings emphasis hadbeen on reining in housing ASPs to more affordable levelsand imposing curbs on rapidly rising housing volumes andprices. From the language used at yesterday’s meetingswe detected a subtle shift to a less militant and moremodulated approach to property curbs.

We expect long-term controlling mechanisms to be rolledout in the coming months, including provisions for boostinghousing and land supply, property tax trials, and measuresdesigned to replace current demand-oriented controls, suchas housing purchase restrictions, price caps and mortgageloan tightening. The government’s urbanization initiativemay act as a counterbalance to the aforementionedmeasures, however. Certain names we cover would almostcertainly benefit from the program, in particular leading citycomplex developers with long track records of buildingredevelopment projects in suburban areas. CR Land(1109 HK, Outperform) and Country Garden (2007 HK,Outperform) are two prime examples.

Action. We expect to see a bump in property developervaluations ahead of interim results and the peak propertysales season in 3Q. In the long term, because of theuncertain macro outlook coupled with credit tightening, wesuggest investors seek modest gains with the followingpair-trade that hedges sector-wide policy risk: longGreentown China (3900 HK, Outperform) and short R&FProperties (2777 HK, Neutral). In the event of share priceweakness, we also advise accumulating CR Land and COLI(688 HK, Outperform), two defensive names that enjoystable income streams from commercial properties. Forinvestors with a somewhat stronger appetite for risk,SUNAC (1918 HK, Outperform) would be worth a lookgiven its robust sales and growth in saleable resources in3Q13.