China Real Estate-UK/US investors’feedback:Navigating near-term policy risks

EU and US investors’ view is more liberal than expected. Most investorsrecognized the depressed valuation of the sector versus burgeoning physical marketperformance year to date. They are currently navigating the macroeconomiclandscape and need to get comfortable with the near-term policy risks to becomemore constructive on the sector. There is unanimous preference for quality in stockselection rather than chasing beta. Investors’ interests were concentrated on thelarge SOEs, but our pitch on conviction Buy Longfor also garnered attention.

    Housing policy bifurcation is the new normal. Recent tightening of housingpolicies in selected cities has caused confusion among investors. We believe thegovernment’s top priority is stable home prices, with robust transaction volumes.

    There is a focused commitment to non-first-tier cities, with the aim of stimulatingconstruction starts and real estate investments. Given the tight supply in Shenzhenand Shanghai (based on the low inventory months), we do see high probability offurther policy risks, while Guangzhou is likely to be more policy risk immune.

    Monetary policy is the driving force behind the scenes. While housing policiesprovide a clear reflection of the government’s intent, the real force behind thehousing market recovery is loose monetary conditions since late 2014. Investors aregenerally expecting a noticeable pullback in credit expansion over the next fewmonths that may derail property sales momentum. We concur with our economist’sview that the government remains mindful of downside risks to growth and that fiscalexpansion will require accommodative monetary conditions.

    Need to move on from excitement of onshore bond market. While onshoreissuances have remained active year to date, we believe developers have turnedtheir attention to more aggressive sales execution as a means to fund their landbankreplenishment and increased starts. Investors are watching with interest the rampantgrowth in land prices in tier-1 and selected tier-2 cities and the potential margin impacton developers. We believe developers should remain level headed and focus onhitting their sales targets rather than their land acquisition targets in 2016.

    Contracted sales in 2Q will be the key to share price performance, as the marketis concerned with the high base effect and policy changes whereas developers haveadopted a low-ball strategy in managing expectations on 2Q sales. Longfor’s year-todatesales execution has been ahead of the market and peers, and the stock is ourconviction Buy.