China Property Shares to End Year 20% Lower: Pro

Shares of Chinese property heavyweights that significantly outperformed in the first half of the year could lose as much as a fifth of their value from now until the end of 2011, says one analyst.

Apartment buildings in Liaoning Province, China.
Jerry Driendl | The Image Bank | Getty Images
Apartment buildings in Liaoning Province, China.

Du Jinsong, Head of China Property Research at Credit Suisse, says the sector is looking expensive and expects companies such as China Overseas Land & Investment , Longfor Properties and Evergrande Real Estate to come under pressure in the near term.

“I think the market is overly optimistic,” Du told CNBC on Thursday, referring to investors who have piled in on Chinese real estate stocks on expectations of skyrocketing sales in the coming months, and on hopes the government will soon ease tightening measures.

“We think that the latest state council announcement on continued tightening clearly pointed out that this a wishful thinking,” Du added. “We think that there could be a 20 percent downside for the share price from here.”

The International Monetary Fund’s latest report on China, released Thursday, warns of the potential property bubbles despite signs the country’s inflation is peaking, and says the government will continue to take “progressively tighter administrative measures to stem demand and dampen house price inflation.”

Du says the Chinese government’s decision to expand the Household Purchase Restriction (HPR) — where residents can only purchase up to two properties — to smaller cities will affect those firms that have the most exposure in those markets, like China Overseas Land & Investment, Guangzhou R&F Properties and KWG Property Holding .

“In the smaller cities, the speculation has become more rampant, so that’s actually why the government last week announced the plan to expand the household purchase restriction to smaller cities,” Du said.

The market’s initial focus for the HPR policy was on the Tier 2 and 3 cities, but Du thinks the government will target satellite cities near metropolitan centers, cities near high-speed trains stations and cities rich in natural resources.

“It’s easy to identify roughly which cities will implement those policies, we look at the three categories,” he said. “In all these three categories — property prices went up by more than 50 percent since 2009.”

Editors Note: Du Jinsong has no personal holdings in the companies mentioned above.