China poised to solve its real estate inventory problem: JPMorgan
New York
AS Chinese equities start the year in free fall, one analyst has a counterintuitive call on what is perhaps the country's most feared sector: real estate.
While the China Developers Index is down roughly 35 per cent from its 2015 peak, China's shaky property market began a stretch of outperformance relative to the Hang Seng China Enterprises Index in the final two months of the year.
JPMorgan analyst Ryan Li thinks this momentum will continue in 2016. What's more, he contends that the prospect of improving fundamentals in the real estate market means this segment warrants attention not just from traders but also from investors with a longer time horizon.
"For the first time in six years, the market could start looking at China property not only from a trading perspective, but from a long-term stable demand/sup- ply perspective," he asserts. "The sector could see a gradual but slow re-rate starting (in) 2016."
Key to Mr Li's call are continued reforms of the Chinese household registration system, or hukou, in which citizens' access to benefits is determined by their place of permanent residency. A little less than one-fifth of China's populace live in cities without an urban hukou, and are therefore unable to access said benefits while residing there.
In this respect, the Chinese model hearkens back to the English welfare system in the wake of the Poor Relief Act of 1662: paupers could obtain aid, but only in the parish in which they were settled.
This requirement crimped labour mobility, argued Adam Smith in The Wealth of Nations, a critique that can be transposed 350 years later to modern-day China. On a similar note, promoting urbanisation by bolstering the safety net for rural migrants is an important channel through which the inventory problems (all those empty buildings) in Chinese real estate could be resolved.
"With the government's intention to encourage 'human- oriented' urbanisation through hukou reform, more rural residents will move to cities with better access to social security," predicted Mr Li.
If the Chinese government is able to realise its urbanisation goal, Mr Li calculates that the demand for homes would increase by 3.5-4.5 million per year through 2020 - growth of 33 per cent relative to 2015.
Achieving this, however, would entail a massive and sustained increase in the number of net new urban registrations relative to the past five years. The analyst reckons this would be a particular boon to developers with a higher degree of presence in the lower-tier cities that the Chinese government is looking to push its citizens towards.
"Changes might involve changing rules to allow individual ownership in rural areas and a 'go-back' mechanism; directives to induce the proper type of individual to get an urban hukou; and a mechanism on how to provide sufficient funding to the local governments to support policy changes," wrote Mr Li, speculating on reforms that could be deployed in pursuit of this target. Bloomberg
