Bloomberg News

Analysts See Biggest Gain in China Property as Shorts Increase

November 13, 2011

Nov. 11 (Bloomberg) -- Analysts’ forecasts show real-estate stocks will rally more than any other industry in China during the next year, even as wagers on declines climb to the highest level since at least 2008.

Developers in the MSCI China Index will surge 46 percent on average by November 2012, the most among 21 groups in the equity gauge, based on analysts’ estimates compiled by Bloomberg. At the same time, bearish bets on property companies have doubled to 12 percent of shares available for trading this year, according to Data Explorers, a London-based research firm.

Bulls say speculation about the bursting of an asset bubble in China’s property market is overblown and the shares are cheap after the average price-earnings ratio for the group fell 44 percent from an April peak to 5.77. Bears say real-estate stocks will extend this year’s slump after housing transactions in October fell for the first time in three months and government officials pledged to maintain real-estate curbs.

“The shorts are saying that this is U.S. subprime all over again,” said John Ventre, a London-based fund manager at Skandia Investment Group, which oversees about $22 billion, in a telephone interview on Nov. 3. “My take on that, or the bull case, is that it’s actually not that severe. When you look at it in totality, it’s probably all okay. The bear case has been priced in pretty significantly in the last two or three months.”

New loans in China since September 2008 totaled $3.7 trillion, while property prices have climbed about 60 percent since the end of 2006, according to the International Monetary Fund and government data. China ordered state-owned banks to increase lending and urged local governments to boost spending on infrastructure and housing to maintain growth during the 2008 financial crisis.

‘Severe’ Outlook

Access to credit has tightened this year after China increased down-payment requirements and mortgage rates on some homes and imposed housing-purchase restrictions in about 40 cities. The credit outlook for Chinese developers will be “increasingly severe” as a result, Standard & Poor’s said in a report on Sept. 27.

Real-estate companies are among the cheapest stocks in the MSCI China amid concern government curbs on the housing market will spur more bad loans and cut property demand. The value of homes sold last month dropped 25 percent to 372.3 billion yuan ($58.7 billion) from September, according to data released Nov. 9 from the statistics bureau.

Bankruptcy Priced In

China’s economy may expand 8.5 percent next year, the slowest pace in a decade, said Li Daokui, a central bank adviser at a Nov. 4 conference in Beijing. That’s still more than three times faster than the 2.7 percent estimate for global growth next year, based on economists’ forecasts tracked by Bloomberg.

Valuations for Chinese property shares now account for a high probability that companies in the industry will go bankrupt, according to Frank Chen, a real-estate analyst for BNP Paribas SA. He says the chance of that is “remote” and has “buy” recommendations on 9 of the 10 stocks he covers, including Agile Property Holdings Ltd.

“Demand is still very strong,” said Chen in a Nov. 4 interview from Hong Kong. “A loosening of monetary policies could provide the much needed catalyst for property stocks to rally.”

China’s inflation in October slowed by the most in almost three years, giving officials more room to support growth. Consumer prices rose 5.5 percent last month from a year earlier, the statistics bureau said on its website on Nov. 9, matching the median economist forecast compiled by Bloomberg.

Heavily Shorted

Share-price forecasts from analysts show Agile, which develops hotels and apartment complexes, will rally 87 percent in the next 12 months, the most among stocks in the MSCI China, data compiled by Bloomberg show. The Zhongshan City, China-based company said on Nov. 4 that contracted sales from January to Oct. 7 rose 17 percent from last year. The stock is down 45 percent this year.

Real-estate companies are among the most heavily shorted in the MSCI China. More than 20 percent of the shares available for trading for Shimao Property Holdings Ltd. and Evergrande Real Estate Group Ltd. have been borrowed and sold by investors who hope to repurchase the securities at a lower price and pocket the difference, according to Data Explorers.

“I don’t want to be too aggressive in this industry,” said Terrace Chum, Hong Kong-based managing director of greater China equities for Manulife Asset Management, which oversees $199 billion, in a Nov. 3 phone interview. “The government is still kind of putting on the brakes.”

Evergrande Accounting

Shimao Property has fallen 41 percent this year even after saying on Oct. 11 that contracted sales for the nine months ended September rose 25 percent from a year earlier. The Shanghai-based company has 19 “buy” recommendations from analysts, 8 “holds” and 2 “sells,” according to data compiled by Bloomberg.

Evergrande, China’s second-biggest developer by sales, has fallen 46 percent since a July peak. The Guangzhou-based company filed inaccurate financial statements in 2009, China’s ministry of finance said on Oct. 12. Evergrande said at a press conference the same day that the irregularities have been rectified in the 2010 financial report.

“Some property developers have the problem of reporting inaccurate revenue figures, overstating costs and delaying or underpaying taxes,” according to the ministry’s statement.

Premier Wen Jiabao said last month that the government will “firmly” maintain its control over the property market even as it seeks to “fine tune” other economic policies. Home prices in China will fall as much as 30 percent in the next year, according to a Nov. 8 Barclays Plc report.

“If you speak to the management, they will tell you that everything is fine,” said Tim Gibson, head of Asia-Pacific property research at Henderson Global Investors, which oversees about $104 billion, in a Nov. 2 interview from Singapore. “On the ground, what we’re seeing is things are not fine. After Europe, the Chinese residential market is the biggest concern for fund managers.”

--Editors: Nick Gentle, Allen Wan

To contact the reporters on this story: Lynn Thomasson in Hong Kong at; Jonathan Burgos in Singapore at

To contact the editor responsible for this story: Nick Gentle at

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