Why China Home Curbs Are Not Bad News for Stocks

A potential buyer speaks with a real estate agent at a residential property fair in Shanghai, China.
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A potential buyer speaks with a real estate agent at a residential property fair in Shanghai, China.

Speculation that the Chinese government will implement further measures to cool the country's bubbly property market has sent stocks of major Chinese developers tumbling in recent weeks. But analysts tell CNBC this provides investors an opportunity to hunt for bargains.

China's cabinet on Wednesday restated intentions to extend a pilot property-tax program to more cities and urged local authorities again to put price-control targets on new homes, in a fresh bid to calm frothy real estate markets.

That spooked investors and triggered a sharp fall in property stocks on Thursday. China's property stocks have suffered their largest drop in more than six months with some of the biggest losers being the Hong Kong listed Poly Property Group, which has fallen 8 .3 percent in value year to date and Country Garden Holdings, which has lost 4.19 percent.

(Read More: What China's New Leadership Means for the Property Market)

According to Tim Gibson, head of Asia-Pacific property equities at Henderson Global Investors, the time is now ripe to buy into this sector.

"Our view is that the pullback that we have seen represents the bad news being priced in. Investors tend to react then ask questions later and in this case they were reacting to policy risk, which has now been reduced. The stocks are cheaper than they were at the start of the year but the fundamentals remain the same," added Gibson.

In the past week, he has been adding to Chinese property stocks on weakness, increasing overall China exposure in the Henderson Asia-Pacific Property Equities fund, going from neutral to overweight.

China Property Shares to End Year 20% Lower: Pro
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Nicole Wong, regional head of property at independent brokerage CLSA, also urged investors to snap up Chinese property stocks on current weakness.

She has been encouraged by fresh data on Friday showing that prices were resilient - average new home prices rose in 63 out of China's 70 major cities in January, an increase of 0.8 percent year on year, compared to a 0.4 percent drop in December.

(Read More: China Home Prices Rise as Property Curbs Loom)

"This is a buying opportunity. Investors should buy now because rising house prices are good news for property stocks. You should always invest when there is a lot of bad news but you feel the uptrend in volume and price will not be derailed. Supply and demand dynamics are definitely improving in China," she said.

China property stocks were trading higher on Friday after data showed the market was resilient. The Hang Seng Properties Index which has declined over 7 percent since the end of January rebounded on Friday.

Wong pointed to national developers as an optimal way to play this trend: "These stocks are the most difficult to buy on the cheap and the least likely to be impacted by the tightening measures," she added, naming state-owned property developers including China Overseas Land & Investment (COLI), China Resources Land (CRL), China Vanke and Longfor Properties.

However, Gibson added a key risk to China's property stocks' recovery would depend on February's inflation number, to be reported in early March, as accelerating inflation tends to negatively impact property markets. Consumer inflation eased to 2 percent in January from December's seven-month high.

(Read More: China Inflation Accelerates - Time to Remove the Punch Bowl?)

"If inflation comes out too high then this could prove a trigger for people to sell out of property. However, our view is that inflation will be a stronger story for China in the second half of this year," he added.