ab3 January 2024Global Research and Evidence LabChina PropertyAPAC Focus: How to end the deleveraging cycleChina's property market has been stuck in a negative feedback loop despite multiple policy-easing measures. However we view the recently announced urban village renovations and social housing programmes as potential game-changers. We think these schemes could help the market fully digest excess inventory by January 2025 at the latest – almost a year earlier than our previous estimates. As a result we turn more positive on the sector after three years of being bearish. COLI (upgraded to Buy) is our top-pick. Urban village renovation and social housing are potential game-changersDespite numerous policy easing measures, China's property market has been stuck in a negative feedback loop where falling property prices cause weak price expectations, which results in delayed property purchases and even further selling in the secondary market. However we think the recently announced urban village renovations and social housing programmes are potential solutions to create demand and reduce inventory in the market, accelerating the inventory digestion cycle. We estimate urban village renovation may contribute 5% of national new home sales, while social housing could be used to harmonise housing supply to mitigate further price cuts by developers or homeowners. PBoC announced Rmb350bn Pledged Supplementary Lending (PSL) funding increase in Dec 2023, the first time in the past 13 months, suggesting the funding support may be coming. Faster inventory digestion leads us to reverse our 3 year bearish view We previously expected the inventory digestion cycle to be complete in December 2025. However our detailed analysis of these two schemes leads us to conclude that inventory digestion will now be complete by January 2025 at the latest - almost a year earlier than our previous estimates. As a result we turn more positive on the sector, having been bearish for the last three years. Since urban village renovation and social housing mainly target tier 1-2 cities, the potential property sales recovery is likely to be limited to these cities. We have upgraded COLI (now our top pick) and Longfor from Neutral to Buy due to their high exposure to tier 1-2 cities, and in Longfor's case, its business transformation. This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 22. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.EquitiesChinaReal EstateJohn ...
