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Morgan Stanley Raises Property in China Portfolio

Morgan Stanley is adding to the weighting of property stocks in its China model portfolio, saying that a further volume recovery in the nation’s housing market is “imminent.”

The brokerage added China Overseas Land & Investment Ltd. to the model and increased its position in China Resources Land Ltd., according to a report by analysts led by Jerry Lou. A recent increase in residential rents point to pent-up purchase demand, while a greater supply volume in the second half may drive “deeper” price cuts, the analysts wrote.

“From what we observe in the few developers that have been bold enough to cut prices early, their sales volumes have been very impressive,” the analysts wrote. “Further volume recovery in the Chinese property market is imminent and we should increase our ‘overweight’ position.”

The 17 developers traded on the MSCI China Real Estate Index have dropped an average 12 percent this year after the government introduced curbs ranging from a ban on third-home mortgages to higher down-payments for second homes. The MSCI China Index has retreated 4.5 percent in 2010.

Home prices in 70 major Chinese cities rose 10.3 percent in July, the slowest pace in six months, the statistics bureau’s newspaper, China Information News, reported on Aug. 10. The value of sales fell 19.3 percent from a year earlier, while transactions by floor area shrank 29 percent from the previous month.

‘Overly Bearish’

Investors are “overly bearish” on China’s property stocks, according to Frank Shi, a Hong Kong-based investment director at Prudential Asset Management. The negative sentiment on Chinese real estate means there may be investment opportunities in the industry, he said.

“The risk for a property bubble in China is much, much lower,” Shi told reporters in Singapore on Aug. 13.

Morgan Stanley added a 2 percentage point weighting in China Overseas Land to its China model portfolio. The Hong Kong-listed developer controlled by China’s construction ministry said on Aug. 10 property sales rose 21 percent in July from a year earlier.

The brokerage also increased its weighting of China Resources Land by 2 percentage points to 4 percent, according to the report. It trimmed the weighting in China Petroleum & Chemical Corp. and removed China Pharmaceutical Group Ltd.

“Our model portfolio now has even higher beta, with our most heavily weighted industries being properties, banks, steel and construction materials,” said the analysts, referring to a measure of risk. “We are bullish on the outlook for Chinese equities.”

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