Real Estate

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

When it comes to buying property, location matters. The same goes for investing in property companies. Even as home sales in China have accelerated, stocks of developers on the mainland have lagged their counterparts in Hong Kong, where prices are going the other way.

While the higher leverage onshore explains some of that, investors may be overdoing the bearishness.

Sliding Doors
Hong Kong property prices started trending down last year, while in China they began rising
Sources: Colliers International; National Bureau of Statistics; Bloomberg

Shares of the 10 biggest publicly traded Chinese developers by revenue are down on average 15.8 percent this year, underperforming their 10 biggest peers in the former British colony, which have slipped 3.3 percent. The median forward price-to-earnings ratio is 5.7 times for the former group of companies, and 15.8 times for the latter, according to data compiled by Bloomberg.

That's despite the fact companies on the mainland are much bigger. Their average revenue was $12.5 billion last year, versus $3.3 billion in Hong Kong.

Boom Time
Sales of new buildings in China have accelerated to the fastest pace in almost three years
Source: Bloomberg

So what's going wrong?

Headlines, first and foremost. With so much bad news about China's economy and so many bears calling for an impending collapse of real-estate prices, it's easy to ignore the fact that the opposite is true.

The second reason is related, but more serious, and that's leverage. The amount of debt at Chinese developers has increased steadily since they were given access to local bond markets. As a result, S&P has downgraded at least 12 this year, and a quick look shows the ability of real-estate companies in Hong Kong to repay liabilities has always been better.

Fulsome Cover
The interest-coverage ratio of Hong Kong's 10-biggest developers, or the amount of earnings before interest and taxes versus a company's interest payments, is better than in China
Source: Bloomberg

And yet, most leverage metrics can be expected to weaken in Hong Kong if property-price softness continues. In China, the trend should reverse, at least it would if it weren't for firms' seemingly endless appetite for debt. That warrants a discount, for sure, but fails to explain how even the sector's healthiest companies, such as China Vanke, are being snubbed by investors.

Not Fair
China Vanke's valuation has dropped below Wheelock's, in spite of having better leverage metrics, and the fact it generates three times more revenue and is in a market where prices are climbing
Source: Bloomberg

What's clear then is that global investors are so China-averse they're avoiding companies even if their prospects are improving.

With most large developers on track to meet their sales targets, and with apartments from Shanghai to Shenzhen flying off the shelves, money managers may want to revisit those assumptions.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net