China Property Sector:No major imminent risk seen in physical market,but...

What’s new: We recently visited Nanjing and Hangzhou to check out the latest market conditions. While we do not expect to see a major price correction in China soon, we believe it will be hard for the physical market environment to remain as good as it has been in 2016, and we have concerns about some developers’ business strategies.

    What’s the impact: Nanjing and Hangzhou city centre projects should hold up due to relatively limited supply. While the new measures are relatively more severe in Nanjing than other cities, the sales for the two projects we visited (The Metropolis and La Vie Est Belle) remain strong so far, probably because both these projects are located close to the city centre and we believe the supply will remain limited in the foreseeable future -the salespeople on the ground are expecting the pace of sales to slow but overall ASP to hold up. The Jinmao Palace project in Hangzhou (which is also close to the city centre) seems to exhibit a similar situation.

    City fringe projects are less strong, however. We also visited the Art Condominium project in the Jiangning district in Nanjing, which is in the suburban area. We note that the project’s sales momentum seems to have been more greatly affected. We also saw a similar situation for the Luna Sea and Longyue projects located in the Xiaoshan district of Hangzhou, where we got the impression that the salespeople are somewhat uncertain about the ultimate impact of various government measures.

    Low housing inventories should provide some cushion. We note that home sales value have been very strong in both Nanjing and Hangzhou in 9M16 (up 114.6% YoY and 60.7% YoY, respectively), which has resulted in historically low inventory durations as of September (Nanjing: 1.7 months, Hangzhou: 3.7 months). This is a far cry from the situation in 2H14, when the figures for Nanjing and Hangzhou were 12.5 and 28.8 months, respectively. Our read is the pace at which sales have increased YTD in these 2 cities has surprised many developers, and we believe that it would take time for them to come up with more saleable resources in these cities, which should provide some cushion to the sector.