Nomura Rates China Property `Cautious' Amid Possible Tightening Measures

China’s property stocks were rated “cautious” in new coverage at Nomura Holdings Inc., which said there’s an increased risk of the government issuing new tightening measures.

The introduction of property tax in the “overheated” cities of Beijing, Shanghai, Shenzhen and Hangzhou as well as the “full” enforcement of the land appreciation tax will likely be among policies used to curb speculation, Alvin Wong and Sunny Tam wrote in a report today. Average residential prices may fall 5 percent to 10 percent by the end of next year, according to the brokerage.

Property prices in 70 major cities across China increased 9.3 percent in August, slowing from a 10.3 percent gain in July, according to the statistics bureau. The value of sales still rose about 15 percent from July amid higher volumes, defying a crackdown on the nation’s real estate market earlier this year.

“Affordability is starting to get stretched in some overheated cities, while public housing supply does not seem sufficient to create a meaningful impact on overall housing supply,” the analysts wrote. “With this we believe there is higher risk of further tightening measures to clamp down on overheated markets.”

The 18 stocks on the MSCI China Real Estate Index have dropped an average 12 percent this year, compared with a 1.8 percent gain in the broader MSCI China Index. The government last week added to curbs by tightening down-payment rules for first homes, suspending third-home loans and pledging to quicken a trial of a property tax.

Photographer: Nelson Ching/Bloomberg

Property prices in 70 major cities across China increased 9.3 percent in August, slowing from a 10.3 percent gain in July, according to the statistics bureau. Close

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Photographer: Nelson Ching/Bloomberg

Property prices in 70 major cities across China increased 9.3 percent in August, slowing from a 10.3 percent gain in July, according to the statistics bureau.

‘Inevitable’ Tax

Given the lack of “strong evidence” of a price correction and continued signs of “speculative activities,” a property tax will be “inevitable,” the analysts said. The government may impose a tax rate of around 0.8 percent a year on the property’s historical value, with Shanghai, Beijing, Shenzhen, Hangzhou and Chongqing likely to be the first cities to undergo a trial, according to the report.

Investors should therefore favor developers that are less exposed to these “overheated” cities, according to Nomura. The brokerage was ranked first in China research by Institutional Investor magazine’s inaugural All-China Research Team ranking.

The analysts initiated China Overseas Land & Investment Ltd., Agile Property Holdings Ltd., KWG Property Holding Ltd., Poly (Hong Kong) Investments Ltd. and Shimao Property Holdings Ltd. with “buy” recommendations and rated Country Garden Holdings Co. and Sino-Ocean Land Holdings Ltd. “neutral” in new coverage.

China Resources Land Ltd. and Guangzhou R&F Properties Co. were also rated new “reduce” at the brokerage, according to the report.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Reinie Booysen at rbooysen@bloomberg.net

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