Monday saw China’s Shanghai Composite benchmark slump by over 3.5%, in large part because of tightening measures on property purchases announced by the central government last Friday……
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Laura Luo, Fund Manager, Chinese Equities
These measures included ordering cities with ‘excessively fast’ price gains to implement higher down payments and interest rates for second-home buyers. There was also an order to more strictly enforce a 20% capital gains tax.
Previous measures, such as minimum down payment requirements, have been a favoured tool of policymakers looking to cool down China’s red-hot housing market. In terms of the latest measures and their effects on the physical market though, we expect some home buyers to hold a wait-and-see attitude initially, but strong underlying demand will still push up transaction value for the year. The capital gains tax order will have a limited impact, as this is not a new measure and has been easily avoided in the past. Nonetheless, we should wait for more detailed measures from local governments and banks to better judge the policy impact.
However, where the negative impact will be likely seen is in listed Chinese property developers. This policy environment, in an attempt to rein in surging prices, means the sector is hard to outperform. We foresee a market reaction similar to that of 2010 where policy tightening capped physical market gains to the mid-teens, while listed property companies’ PE multiples were significantly de-rated. This divergence means the sector looks likely to underperform the benchmark. However, this risk will be somewhat mitigated by continued underlying earnings-per-share growth.
Within the sector, we continue to favour companies that have a large interest in mass market, local end-demand projects. This is an area where we see less policy risk. We remain wary of developers with a specific focus on high-end projects, which are more likely to be negatively impacted as a result of their focus on investment and upgrading demand – particularly of second-home buyers.
Source: Schroders
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