Citi: China property bifurcation deepening

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From Citi:

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Best of times vs. worst of times: In a stabilized but polarized overall property market, we see the “best of times” ahead for quality names as consolidators that are progressing well with their business model transformations (asset-light with high turnover, best city exposures and/or diversified income streams). By contrast, the “worst of times” are crowding in for property companies with an old business model – asset-heavy with high gearing and low asset turnover. Over the longer run, sector consolidators will evolve into a top-tier of quality property companies with mature business models, sustainable growth and lower exposure to market cyclicality.

 Sales picking up strongly in Tier 1/2 cities post recent aggressive policy loosening: Government policy could continue to be stimulative until the physical market shows more signs of improved REI and GFA starts – eventually ensuring a soft landing for the sector. We revise up our assumptions for 2015: i) Tier 1/2 cities’ sales value up 9.8%yoy (from previous up 2%), ASP up 4.1%yoy; ii) National sales value up 1.1%yoy (from previous down 10%) on higher ASP assumption while we stay bearish on Tier 3/4 cities (sales value down 8.0%yoy, ASP down 1.1%yoy).

Somewhat more bullish than my outlook but a solid base case. Recall that city tiers 3 and 4 make up 75% of Chinese construction so this is still a very bearish outcome for Australian exports:

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.