Real Estate Developers:Early signs of third-mortgage loosening in Shanghai

Shanghai banks now resume lending to third homebuyers。

We checked with local banks in Shanghai and understand that the majorityof them have resumed mortgage lending to third homebuyers, though therequirements related to down-payment and mortgage rates are still high(down-payment of at least 60% and mortgage rate generally at a 20%premium to the PBOC benchmark lending rate) compared to theirmortgage policy for first and second homebuyers.

Positive implications for property stocks in the near term。

As we think both Beijing and Shanghai are more targets for the latestgovernment tightening in April than other cities, we believe the apparentlending loosening in Shanghai now might send a signal to the stock marketthat other cities may follow. Anecdotal evidence suggests that most othercities’ current mortgage lending practices are already less stringent thanShanghai’s. Further loosening in these cities might result in even smallerdifferentiation by banks of mortgage policies between second and thirdhome purchases, which would help improve the take-up of property salesin the near term and thus potentially lead to volumes bottoming out in thecoming selling season. We believe this might have a positive impact onstock prices in the near term but might also increase confusion overgovernment policy objectives as well as raise doubts over the industry’smedium-term outlook should property prices resume their rapidappreciation, fuelled by such loosening.

Potential sector rally in the near term should policy loosen more。

The sector is trading at 15% and 10% lower than average levels during Janto April but before tightening in mid-April on both 2010E NAV discount andP/B metrics, respectively. Gradual loosening of mortgage policy mightpush the sector’s valuation higher and we estimate 21%/38% averageupside potential should the sector trade back to 2010 average P/B levelsbefore tightening or 2010 peak levels, and 12%/28% should it trade back to2010 average discount to NAV before tightening or 2010 peak levels.

We will closely monitor any mortgage policy changes in other cities toassess the likely impact on developers’ earnings. Our Buy ideas are:Evergrande and Vanke (A) (both on Conviction list), Fantasia, Vanke (B),Poly, Gemdale, Agile, Poly HK, Powerlong and China Resources Land. OurSell ideas: Shenzhen Investment (on Conviction List), Greentown, OCT,Forte and CWTC.