There is an adage in financial markets that real-estate stocks usually outperform when there is a slowdown in the real-world economy. This theory proved to be a winning strategy in the first six months of this year.
Despite repeated measures by central and local governments to cool the property market, leading developers including Future Land, OCT, Vanke and Poly have posted strong growth in the first half. Most brokerages are advising institutional investors to be overweight in real-estate stocks in the second half.
The real-estate sector is crucial to the Chinese economy, and remain so for the next few years. At present, the cooling in the property market has been priced in, with many leading developers underperforming the market in the past two years. From an asset to price point of view, many real-estate developers represent good value to investors as they lower their risk appetite.
Given the massive size of the Chinese market, demand for housing will remain enormous. However, there will be a growing divergence in price levels based on geography, and this will continue to favor the strongest real-estate developers. In 2017, these real-estate market leaders will post year-on-year growth in their results, and will appeal to investors who are adopting more conservative strategies.
As the real-estate market in China continues to slow down, this should be good news for the stocks of leading players in the sector.