China Property Stocks Won't Stay Cool for Long

By Ese Erheriene Features Dow Jones Newswires

China-related property stocks, which made strong gains this year, sold heavily on Monday as investors reacted to another wave of tightening measures by Beijing. But many analysts say the decline is likely to be short-lived.

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The Hang Seng Index property subindex fell 2.9% to a five-week low, notching its biggest one-day decline since Nov. 7. "We're seeing a lot of profit-taking on caution," said Woon Tian Yong, an analyst at Informa Global Markets.

The drop led the overall Hang Seng Index lower, which fell 1.4%, its biggest decline since mid-August. The benchmark is still trading 25% higher this year, thanks in part to huge gains by developer stocks.

China Evergrande Group, for example, is up 457% this year. Despite Monday's 8.8% drop in share price, there is ample room to take profit. Strong sales, which nearly doubled from 2016 levels for a number of firms, have stoked Chinese developer stocks.

Fresh government measures to cool property prices are expected to trigger further declines in the short term.

Over the weekend, more than half a dozen provincial capitals, such as Shijiazhuang and Changsha, released new rules to tame speculation. The measures follow tighter housing regulations already put in place in the country's biggest cities.

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The steps taken include raising mortgage rates by up to 10% for first-time purchasers in Beijing and requiring home buyers in Chongqing to wait for two years before selling their property, said OCBC Bank.

The tighter policy in second-tier cities "could hurt housing sales in the next few months," said Daniel So, a strategist at China Merchants Bank International.

Chinese officials have for months raised concerns about potential bubbles developing in smaller cities, with home-price gains there outpacing those in places like Beijing and Shanghai in recent months.

Still, most analysts say they don't expect the selldown to last. Rather, the policy announcement was "an excuse in the short term" to pull back, said Mr. So.

The real-estate sector has been one of the strongest performers in Hong Kong this year, with the Hang Seng property subindex up 29% year to date. Optimism about trends in China, as well as in Hong Kong, has helped to fuel that rally. Hong Kong-focused firms have seen more modest stock gains than their Chinese peers, though some have nearly doubled this year.

The sector rose more than 5% in both July and August on strong interim results and hopes for faster farmland conversion in the city, said Joyce Kwock, head of Hong Kong property research at Nomura. Despite Monday's stock declines, there doesn't appear "to be any major changes in the [sector's] fundamentals."

Write to Ese Erheriene at ese.erheriene@wsj.com

(END) Dow Jones Newswires

September 25, 2017 08:05 ET (12:05 GMT)