Real Estate

Why China property isn’t facing Armageddon

Leslie Shaffer | Writer for
Frederic J. Brown | AFP | Getty Images

China's slowing property market may be drawing comparisons with the U.S. housing bust, but some analysts are starting to call a recovery and see developer stocks as a bargain.

"I foresee price declines for less than six to 12 months and then it will come back to a recovery trend, especially for tier three cities," Carol Wu, head of research at DBS Vickers, said at an event this week for clients of DBS' private bank.

That means the shares of China's developers are in bargain territory on a 12-month horizon, she said. The sector is "really quite attractive" at around five times earnings, with even the biggest players such as Vanke and COLI trading around six to seven times earnings, compared with expectations for growth of around 10-20 percent over the next few years, she said.

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Concerns that China's property market is a popping bubble have moved to the front burner recently, with home sales in the January-May period down 8.5 percent on year in value terms. Property is estimated to account for around 20 percent of the mainland's gross domestic product (GDP).

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Wu believes the slowdown is in reaction to 2013's strong sales, when many homebuyers advanced their purchases out of fear prices would continue to rise.

She expects prices in tier two and three cities will fall another 10-20 percent over the next 12 months as developers begin to cut sales prices more aggressively. China's tier system ranks cities on their population size, services standards and stage of infrastructure. Although there's no strict definition, the first tier generally includes China's four biggest cities, while tier-two cities generally are provincial capitals and special administrative cities with a population of above 3 million.

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But while many analysts point to China's tier-three cities as the least likely to recover quickly, Wu is more bullish.

"If you look at the land supply and new construction starts over the past two years, actually those two indicators have started to fall since 2012," she said. "I actually expect a better demand-supply balance in tier-three cities in about a year. The market will start to recover in a year and maybe in two years we will see tier-three cities coming into an undersupply situation, which will support prices."

Nomura is also relatively bullish on China's property market.

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"The market should be largely stable over the next three to four years (a good time for the market to adjust/slow overall real estate investment), followed by a mild decline afterwards," it said in a note this week. "This is mainly supported by the baby boom in the late 1980s, stable marriage population, number of university graduates, decrease of household sizes, and improving per-capita living space."

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The bank advises investors stick with big developers as they'll likely outperform as the market consolidates and as they have access to cheaper financing.

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CIMB also doesn't expect a property Armageddon.

Prices or sales volumes would need to decline by around 40 percent annualized before developers would no longer be able to service their current debts, CIMB said in a note this week after stress testing the cashflows of 135 listed developers.

By way of comparison, the 2008 and 2012 property market declines saw sales values fall by 16.3 percent and 5.0 percent respectively from their peak to trough, it said.

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"Much of the current pain in the property market was engineered by the central government in order to deflate excesses," CIMB said, citing demand-side restrictions such as tougher mortgage requirements and supply-side regulatory moves including monetary policy to reduce funding.

"As the government engineered this crisis, they can un-engineer the crisis relatively easily if it starts to threaten the financial system in a big way," CIMB said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter