Has China Built Too Many Homes?

The Chinese residential property sector is well supported by end-user demand and long-term positive for leading developers, says Morningstar analyst Phillip Zhong

Morningstar Analysts 15 September, 2015 | 10:32AM
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We believe the Chinese residential housing market remains well-supported by strong end-user demand that is expected to continue over the next decade. This is underpinned by an accelerating urbanisation trend driven by economic growth and government policy. Further, we believe the market has overestimated the excess residential housing capacity by failing to account for the poor quality of housing that a large portion of the population still resides in. Therefore, robust upgrade demand is likely to help absorb supply.

While the sector as a whole is unlikely to experience the high growth rate seen in the past decade, we think commercialisation and consolidation within the sector will provide ample growth opportunities for leading property developers. The recent slowdown in the growth of new real estate construction largely reflects tighter funding access in the midst of the structural reform that China in undergoing. However, we anticipate that bank lending is likely to increase to better quality developers as monetary policy loosens.

While the real estate sector has no moat, as it is highly competitive with few barriers to entry, a continuous consolidation will lead to a few large scale developers forming competitive advantages based on their industrialised construction capability, access to funding and brand recognition.

The urbanisation rate is correlated to economic growth and productivity gain. China's urbanisation trend is likely to accelerate with the growth of the tertiary sector.

The rise of service industries and the consumption economy will lead to more urban residents both as producers and consumers. China's current high homeownership rate is a legacy of the country's history of socialism and its agrarian heritage. We believe the homeownership rate has no bearing on future demand for housing. Rather, the low quality of the existing housing stock suggests strong demand for property upgrades in the decades ahead.

While annual housing demand will remain relatively constant, continued commercialisation and consolidation within the housing sector will provide ample growth opportunities for leading developers, especially those with scale, access to cheaper financing and brand.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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