China Property Stocks Face High Policy Risks: Analyst
China's stock market is the worst performer in Asia so far this year with the Shanghai Composite down about 4 percent, but one sector has been doing surprisingly well.
Most Chinese property stocks listed in the mainland markets have climbed between 5 percent and 15 percent year to date. Those listed in Hong Kong have done even better, up between 20 percent and 70 percent. Analysts say this is partly due to loose monetary policy, which creates appetite for hard assets.
But Du Jinsong, Head of Asia Property Research at Credit Suisse told CNBC's "Capital Connection" on Wednesday that the rally will not last. He warns that policy risks are still high. While Chinese policymakers have vowed to support growth, they have repeatedly said that housing prices must remain affordable.
There is talk that more property curbs are in the offing after the recent uptick in China's real estate prices. Sources quoted by Shanghai Securities News say the central authorities may tighten property policy further, including raising transaction tax on existing homes if prices continue to rise.
China already has numerous measures in place, including limiting the number of units households can buy in major cities and curbs purchases by non-residents.
Du says housing prices in China are a bit misunderstood; it's not a function of GDP or income growth, but of money supply. His research shows that prices have outgrown household income by more than 1,500 percent over the past two decades in major cities, and therefore current price growth is not sustainable. Du is maintaining his mid to long-term bearish view on the sector.
However, for investors eager to invest in Chinese property stocks, there're still some worth considering. Credit Suisse has an outperform call on Vanke, China's biggest residential property developer, due to its strong sales track record.
The Shenzhen-listed stock is trading at a 30 percent discount to 12-month forward net asset value. At 1.7 times estimated price to book, Vanke's valuation is still compelling. Du has a one-year price target of 12.50 yuan ($2) for Vanke, which reflects more than 40 percent upside from current levels.