China Property Credit Survey:Worsening credit outlook hurts only small and leveraged players

Tightening mortgage applications. We asked surveyrespondents to express their views on mortgageapplications and 7 out of 16 reported a decline of10-70% compared with end-April while the rest (exceptChongqing) reported flat or a slight increase in thenumber of mortgage applications. 10 out of 16 sawtightening in mortgage loans, while others reported loanapprovals on hold. The time required for approvals hasalso extended up to several months in some cities.

First-home mortgage discounts have narrowed fromend-April for most cities while second-home mortgagesremained at 10% premium. Loan officers expect to seetightening in second-home mortgages, but first-homemortgages will remain a priority. The quotas for bothmortgage and property development loans are expectedto tighten although some respondents pointed outproperty development loans may see further guidancefrom the PBOC. The pricing of both development andcommercial property loans are at 10-20% premium tobenchmark rates at the moment.

Worsening credit outlook only hurts small andleveraged players. Leading developers have securedenough credit facilities in the beginning of the year, andhave not drawn on credit lines. Loan officers believe thatthe worsening credit outlook for 2H13 will not affect themajor developers, however the small- and middeveloperswill be negatively impacted.

Action. Amid the uncertain Chinese property sector,investors can use pair-trading to hedge againstsector-wide policy risks for modest gains, such as longGreentown China (3900 HK, Outperform) and shortR&F Properties (2777 HK, Neutral). We also adviseaccumulating CR Land (1109 HK, Outperform), COLI(688 HK, Outperform) on share price weakness in viewof developers stable income streams from commercialproperties and good defense against market volatility.

For risk-taking investors, SUNAC (1918 HK, Outperform)is a good investment led by robust sales and saleableresources growth in 3Q13.

Risk. A key downside risk to Chinas property sector is asurge in new home prices in key cities triggering furtherrounds of policy tightening and credit tightening, whichmight cause possible panic selling.