Chinese property prices may be on a tear, but it's time to pull back on exposure to developers' stocks amid a stockpile of unsold supply, Goldman Sachs said.
The bank cut its exposure to the shares from overweight to market-weight, citing in part the sector's 14 percentage-point outperformance compared with the MSCI China index over the past year.
Goldman said it was also concerned that government policy on property may become less supportive, with prices in higher-tier cities having surged over the past year, prompting some cities to introduce cooling measures. The bank noted that tier-one cities accounted for about 30 per cent of the net asset value (NAV) for the developers it covered.
Despite long-running fears over a potential supply glut, China's property prices have had an inexorable climb. In April, home prices in 100 cities rose an average 9 per cent from a year earlier, after rising 7.4 per cent on-year in March, according to a poll from the China Real Estate Index System (CREIS), Reuters reported. The 10 biggest cities, including Shenzhen and Shanghai, saw prices rise 14.4 per cent on-year in April, the report said.
But Goldman estimated that the market was only about a third of the way into destocking property supply nationwide, citing CREIS data that showed inventory in tier one, two and three cities had fallen from peaks of 19-23 months' worth of supply to around 8-10 months currently.
While that sounds positive for property pricing, Goldman noted the gross floor area (GFA), or current residential supply for sale, in the CREIS data set represented only about 2.6 per cent of the residential GFA under construction nationwide.
"The aggregate inventory overhang remains significant, especially in lower-tier cities and in the commercial/office segments, where 10 years may be needed to digest the potential supply," Goldman said.
That doesn't mean Goldman expects a spillover effect on banks, noting that mortgage loans were only about 16 per cent of banks' total loan books as of 2014, among the lowest of major global peers. The loan-to-value ratio of those loans remained low and mortgage-backed securitization wasn't widespread, Goldman said in its report.
Among the developer stocks, Goldman said it preferred stocks of companies focused on destocking and operational improvement, such as Agile, Shimao and Yanlord. It also liked names with the ability to gain market share, such as China Overseas Land and Country Garden, and those with high exposure to strong markets, such as Sino Ocean, Sunac and China Resources Land.
Goldman kept Agile and Poly Real Estate's mainland-listed A-share on its conviction buy list.
Goldman said it expected the inventory overhang to weigh on new construction, with new starts and completions likely to remain weak possibly into 2017, which will in turn weigh on demand for metals.
"China's property sector is the most important single driver of metals demand, with around 20-30 per cent of zinc, copper, steel, iron ore, coking coal and aluminium end use originating directly from the sector," it said.
Any improvement in property construction would likely benefit early-cycle commodities, such as cement and steel, first, rather than copper and aluminium, which were exposed to late-cycle demand, it said.
However, Goldman said it expected one, possibly unexpected, metal may benefit, citing its forecast for 5 per cent property sales growth in 2016, as that would be associated with new consumer appliance and kitchenware purchases.
"The metal most exposed to this, and least exposed to subdued property construction activity, is nickel," it said.