China property stocks rally begins to wobble

This year's rally in stocks and bonds of mainland Chinese real estate developers looks set to peter out, analysts say, as valuations have become less attractive and hopes have dwindled for any rollback of steps taken to dampen home prices.

The tide appeared to start turning during the past week, though China's property sector remains among the best performers across Asia this year, easily outpacing benchmarks.

"The best performance for the China property sector is behind us and further gains will be difficult because of rich valuations and economic headwinds in the second half of 2012,' said Owen Gallimore, ANZ head of credit strategy in Singapore.

"It is doubtful if people want to buy beyond the top-tier names and into the mid-tier after such a strong rally," he said.

An index of property shares in Shanghai is up 17 per cent this year in contrast to the Shanghai Composite, which has drifted into negative territory and is currently near the year's lows.

Valuations for the MSCI China real estate stock index have nearly doubled since the fourth quarter in 2011 when they hit a record low of just four times forward price-to-earnings.

According to Deutsche Bank, a weighted index of 45 bonds from 32 property companies produced a return of 25 per cent in the first half of 2012, easily beating the 6.7 per cent total return for the overall JP Morgan Asian Composite bond Index.

Some individual bonds have even beaten that. Shimao Properties' bond prices maturing in 2017 rose 66 per cent from the October lows.

A rebound in transactions mainly from first time home buyers came as a relief for the property sector earlier this year, lifting it out of the funk it had fallen into by the end of 2011.

According to Macquarie Capital Securities sales volumes in China's tier-1 and tier-2 cities on a four-week average basis bottomed out around February this year and have gathered pace after June.

But as house prices were still in decline through this period and there was growing unease over China's economic slowdown, hopes grew that Beijing would rethink measures taken in the past two years to cool off an overheating property market.

But now, with signs that home prices have bottomed out, the thinking is that Beijing is more likely to leave controls in place to forestall any rebound in home prices.

After data released on Wednesday showed that China home prices broke eight straight months of declines in June, shares in the property sector began retreating faster.

Investors are worried over how the government would respond should sales volumes stay strong and prices begin rising.

By Reuters