Upside In China Property S-Chips?

Source : The Business Times, November 21, 2008

WHILE most Singapore property developers are afflicted by the same predicament - over-supply, low confidence - the Chinese property market is as varied as its landscape.

Take property S-chip CentraLand for example.

Listed here in February, the price of Centra- Land shares at IPO is likely to have priced-in various poor economic data at the time. Even so, its IPO offer price of 50 cents has fallen only 4 per cent since, while share prices of most Singapore-based property developers are more likely to have fallen upwards of 60 per cent.

For the third quarter of 2008, revenue amounted to about 277.4 million yuan (S$62.1 million), recognised from delivery to buyers of 997 units of pre-sold retail and office units in its commercial property project, J-Expo in Zhengzhou.

Located in the Henan province, J-Expo is a wholesale commodities building in the heart of Zhengzhou city, located at the junction of the main road and rail network in central China. In a filing with SGX, CentraLand said Zhengzhou city enjoys good traffic and is an important wholesale centre, especially for women's apparel.

Not many would know this about Zhengzhou, much less know where it is. This being so, CentraLand, which is probably considered more 'exotic' compared to other China property S-chips, is not heavily traded.

Less exotic property S-chips like Yanlord, China New Town Development (CNTD) and Sunshine Holdings are traded more heavily. Their share prices have also fallen dramatically, in line with market movements.

Indeed, since the start of the year, Yanlord, CNTD and Sunshine share prices have fallen 80 per cent, 95 per cent and 92 per cent respectively to very low penny values.

But the paradox is that unlike Singapore (and much of the world) some markets in China, where some of these S-chips have projects, are actually seeing property prices recovering.

Citigroup analysts visiting numerous cities made several conclusions recently. They noted that inner cities like Chongqing and Chengdu looked less affected by the export slowdown and global financial crisis, as their economies are more domestic trade oriented.

In Chengdu, Citigroup added that activity has recovered slightly from the period immediately after the earthquake, but more importantly, it also sees a meaningful difference in terms of sales volume and prices versus the period before the earthquake.

Citigroup did not, however, notice meaningful rebounds in transaction prices and volumes in Shenzhen or Guangzhou, 'and the market is still clouded with the wait-and-see attitude of the potential buyers'.

Citigroup said that in Hangzhou, the provincial capital of Zhejiang province, the situation has been deteriorating, adding: 'As one of China's main export and manufacturing driven provinces, Zhejiang has been significantly impacted by the export slowdown and global financial crisis.'

On the other hand, Citigroup considers Shanghai as one of the most resilient in China, especially for projects located in prime locations. 'We don't see any significant price cuts in the high-end/luxury-end residential projects,' it said, adding that in the past two years, there has also been limited new land supplies in the city centre.

Different Chinese cities also appear to have different property cycles. DTZ Research reveals that property prices in Shanghai peaked at the end of 2005 and then plummeted for a year before rising steadily since the end of 2006.

DTZ's Shanghai property price index rose 40 per cent in Q3 2008 compared with the previous trough in Q4 2006. Prices continued to increased by 3 per cent quarter-on-quarter in Q3 2008 and 5.2 per cent compared with Q4 2007.

In Guangzhou and Shenzhen, however, property prices only peaked in Q4 and Q3 of 2007 respectively. While prices have recovered somewhat in Guangzhou - with the DTZ price index rising 2 per cent since the previous trough - Shenzhen prices have fallen 16 per cent since Q3 2007.

More interestingly, Beijing prices have been increasing for four years, registering an 8.1 per cent quarter-on-quarter increase in Q3 2008.

Each city appears to react to different micro-economic factors like land scarcity, high levels of speculation, or even the efficiency of local governments to implement policy changes (curiously, the Chinese government's relaxation on mortgage lending in October has not had an impact on share prices).

As such, finding value in the Chinese property market takes a lot of work. But at the same time, it should help to separate the wheat from the chaff.