Dalgliesh allays fears of property crash in China

Returning from a recent trip to China, Peter Dalgliesh manager of Pacific Assets Trust, said there was sufficient evidence to suggest that the outlook for the physical property market remained positive despite fears of government tightening in the sector.

Dalgliesh said that following a sharp but short-lived correction in February the Chinese equity markets had jumped back to trade at record levels and in an effort to dampen speculation activity, the Chinese authorities were likely to impose additional tightening measures to cap the positive wealth effects coming from the buoyant property and equity markets. The Chinese Central Bank has already demonstrated that it will not shy away from taking action, when earlier this year it imposed stricter enforcement of Land Appreciation Tax which led to a widespread sell off in property-related names.

“The sharp market downturn in February was sparked by the Chinese Central Bank reiterating its determination to contain GDP growth to around 8%. But markets have since rallied with GDP growth at 11.1% in the first quarter. With most property developers trading at a premium to net asset value, this has left investors feeling nervous about the sustainability of listed property counters in the face of potential further tightening.

“However, investors should not run for cover because although on the surface the outlook for Chinese property stocks looks uncertain, if you dig beneath, there is clear evidence to suggest that property developers’ revenue flow is not under pressure.”

Dalgliesh pointed to the proportion of property buyers who are owner occupiers which remains high at around 90%. Secondly, he said that around 30% of properties sold were cash purchases, although this is gradually changing. Thirdly, the strength of pre-selling activity remains high helping to reduce the property developers risk profile.

“We have also seen a number of high profile developers, such as Shimao and China Resources Land, issuing stock in order to facilitate further land bank acquisitions, indicating that despite the equity market’s fears of further tightening risks, companies are seeing sufficient opportunities to ignore these,” added Dalgliesh.

“In the Pacific Assets Trust, although we believe in the structural Chinese property story, due to valuations, we only hold one property developer, Neo China. Trading at a 38% discount to NAV, Neo China is unlike most of its peers who are at premiums. Instead we obtain access to the theme via a holding in property investor Hang Lung Properties, whose Chinese property portfolio as a percentage of NAV is expected to grow from 45% today to over 70% by 2010, with additional indirect exposure through Bank of Communications, which is 19% owned by HSBC.

“Chinese banking sector has seen loan growth of around 16% in the first quarter of this year, helped by the expansion in their mortgage loan book. One of the attractions of Bank of Communications lies in its geographical footprint which is centred along the two main river deltas which boast the highest concentration of affluent Chinese who are better able to service their debt,” concluded Dalgliesh.