China’s real estate woes look set to get worse before they get better, raising the prospect of a tough year for stocks in the sector despite the recent rally.
The country’s real estate developers continue to suffer from a years-long crisis that has undermined the confidence of potential buyers, has caused a sharp drop in home prices and left millions of homes unfinished. Economists believe that both home prices and sales in the country will fall next year. The most they can say is that the decline may be slower than in 2024.
The gloomy outlook suggests that the recent improvement in share prices of Chinese developers may prove short-lived. An indicator of Bloomberg The sector indicates that shares are up 2.5% so far this year, after four consecutive years of declines. But the rebound, fueled by the stimuli announced in September, is already losing steam.
According to analysts at Morgan Stanley, the recovery of Chinese developers’ share prices may depend on a persistent recovery in sales, but that seems a long way off. The Wall Street bank expects sales to fall 12% next year and home prices to decline by a large percentage. Fitch Ratings expects prices to fall 5% in 2025 and new home sales to decline 10% by area.
According to analysts, the pressure on share prices means that iInvestors should focus on companies with strong ties to the government. China Overseas Land & Investment and China Resources Land are among the top picks according to recent research notes published by Morgan Stanley, Morningstar and CGS International Securities HK.
“We see that some large central state developers have room to increase valuation,” says Morningstar analyst Jeff Zhang in statements reported. Bloomberg.. In his opinion, Home prices could stabilize in the second half of next year.
Morgan Stanley expects market consolidation to accelerate in 2025 as private developers focus on completing projects and deleveraging. That will create more room for major state developers to gain market share, according to the bank’s analysts.
Still, the sector as a whole remains a problematic hotspot in the Chinese economy, and there are signs that the problems facing some companies are increasing.
The alarms are ringing
China’s financial industry regulator recently asked insurers to disclose their exposure to China Vanke Co., the country’s fourth-largest property developer, raising alarm bells about the risk of default. New World Development Co., a Hong Kong company with exposure to mainland China, has asked lenders to delay some of its maturities. Parkview Group is looking for buyers for a popular Beijing shopping center.
At the recent Central Economic Work Conference, Beijing said it would step up efforts to help the market, although it did not offer many details. Local governments have also tried to help, with measures taken by officials in Shanghai, Beijing and Shenzhen to ease restrictions on home purchases. but until now the fragmented approach to the stimulus has produced only brief responses in the market, and some analysts believe the sector’s problems are too deep-rooted for this year’s positive performance to mean much in the long term.
Greater political support could trigger “short-term tactical rallies” for real estate stocks next year, but the market will remain weighed down by structural challenges, concludes Bloomberg Intelligence analyst Kristy Hung. “Weak fundamentals may continue to be a drag on valuations,” he notes.
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