Templeton Braving China’s Housing Bubble

China Vanke's Fun City Apartment Complex
A Chinese flag flies in front of a residential building under construction at the Fun City apartment complex, developed by China Vanke Co., in the Fangshan district of Beijing. Photographer: Tomohiro Ohsumi/Bloomberg

The rout in China developers that sent valuations to record lows is spurring UBS Wealth Management and Templeton Emerging Markets Group to say it’s time to buy.

While some investors are concerned profit growth at developers will slow as banks curtail lending, UBS Wealth’s Kelvin Tay says tighter credit will encourage more disciplined spending and prove beneficial for the industry. Templeton is buying real estate companies with lower debt levels and projects in larger cities such as Shanghai, where house prices climbed 18 percent last month from a year earlier.

The Shanghai Property Index has fallen 12 percent this year through yesterday as borrowing costs rise and local governments take steps to rein in home values. That left the developers’ gauge valued at 1.1 times net assets, the least since Bloomberg began tracking the data in 1998 and a record 25 percent discount to the MSCI All-Country World Real Estate Index.

“We found a couple of these very good, strong property companies focused on very key markets and we have invested in them,” Dennis Lim, a money manager at Templeton who helps oversee more than $50 billion in emerging markets, said in an interview yesterday from Singapore without naming specific companies. “Everyone talks about a housing bubble in China but it’s not one homogeneous country.”

The $12 billion Templeton Asian Growth Fund has returned 20 percent annually during the past five years, outperforming 88 percent of peers tracked by Bloomberg. The fund has dropped 2.8 percent this year, lagging behind 76 percent of rivals.

The Shanghai gauge’s relative-strength index fell yesterday to the lowest level since the end of June, when shares began a three-month rally.

Deeply Undervalued

China Overseas Land & Investment Ltd. and China Resources Land Ltd. have turned into buying opportunities after the selloff, China International Capital Corp. analysts wrote in a report dated Feb. 26. Shimao Property Holdings Ltd. and Longfor Properties Co. were among the recommendations from JPMorgan Chase & Co. analyst Ryan Li.

“If you have the risk appetite for it, the property counters are very, very deeply undervalued,” Tay, the chief investment officer for the southern Asia-Pacific region at the wealth management unit of UBS AG, said in an interview from Singapore Feb. 26.

Loans Delayed

Property shares tumbled for six straight days as data showed price growth for new homes in China’s first-tier cities slowed in January, while Industrial Bank Co. said it will delay loans for property-related projects until the end of March.

The Shanghai developer stock-index rose 1.2 percent at the close, the most since Feb. 10, while the Hang Seng Property Index climbed 0.9 percent in Hong Kong.

China Overseas Land and China Resources have both slumped at least 19 percent through yesterday since their highs in January last year. China Overseas Land may rise 30 percent in the next 12 months, according to analyst target-prices tracked by Bloomberg, while China Resources may rally 41 percent.

Falling valuations aren’t enough to lure Bocom International Holdings Co., which said earnings have peaked along with gains in property prices.

“Cheapness is never a reason to buy these stocks,” Hao Hong, the chief China strategist at Bocom, said on Feb. 25. “Property stocks may look cheap on a price-to-earnings and price-to-book basis because they are trading on peak earnings and high property prices support their net asset value.”

Developer Profits

China Vanke Co., China’s biggest listed developer, posted 2012 net profit of 12.6 billion yuan ($2 billion), an increase of 30 percent from the year earlier. China Overseas Land’s net income gained 21 percent, while China Resources Land reported a 30 percent increase. Profits for all three companies were the highest in at least four years.

While home prices in the biggest cities climbed in double digits in January from a year earlier, growth is slowing. Prices rose 0.4 percent in the capital city of Beijing and the southern business hub of Shenzhen from the previous month, the weakest pace since October 2012, according to the National Bureau of Statistics. Prices in Shanghai added 0.5 percent, the smallest increase since November 2012.

More than 90 percent of the 42 major Chinese cities tracked by SouFun Holdings Ltd., the nation’s biggest real-estate website owner, posted a decline in property sales last week from a year earlier, according to a Feb. 25 statement. Some Chinese developers may default on their debt as property trust loans worth about 350 billion yuan mature this year, according to Jefferies Hong Kong Ltd.

Property Demand

China’s households piled into real estate in recent years as they sought returns beyond the regulated caps on savings deposits. With the nation’s stock market failing to keep pace with economic growth, property offered an alternative, along with trusts that channeled credit to borrowers outside the official banking system.

The supply of new property in large cities including Shanghai, Beijing and Shenzhen is still too small to meet demand, according to Templeton’s Lim. CICC analysts predict sentiment toward developer shares will improve as they report higher earnings in the next few weeks.

The Shanghai Property index’s 13-day RSI, used by technical analysts to help gauge turning points, fell to 27.2 yesterday, data compiled by Bloomberg show. The last time it fell to these levels, on June 24, it rallied 33 percent in three months.

“Weak sentiment should continue to weigh on property stocks, but limited downside risks also point to good bottom fishing opportunities,” CICC analysts led by Eric Yu Zhang wrote. “More tangible guidance and fresh views by management during the upcoming reporting season should mitigate concerns and lift market sentiment.”

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