China property: Pole position

Rotation, rotation, rotation. The mantra of any seasoned bull market pundit.

In China's liquidity-inspired rally, the latest beneficiaries are shares in Hong-Kong listed Chinese residential property developers. After lagging most mainland brethren over the first quarter, the sector is catching up, rising an average of two-fifths so far this quarter. State-owned blue-chip and institutional favourite China Overseas Land and Investment, up nearly one-third, is at a record high. Trading at 2 times historic book value, it no longer looks cheap versus its five-year average of 2.1 times. Peer China Resources Land, up a similar magnitude, already trades above its five-year average.

Bears might argue that the run in a troubled sector is further sign of the bubbly nature of China's rally; recent data, however, point to a turnround. On Monday, real estate consultancy Shanghai Uwin said Shanghai new home sale volumes rose by three-fifths in April, with prices up more than 5 per cent month-on-month. At the weekend, official news agency Xinhua said that secondary unit sales in Beijing hit a 25-month high. And last week, April new home prices in China's top cities were flat compared with March, according to property researcher China Index Academy, potentially bottoming. The recovery is trickling down, too. Deutsche Bank says that sales volume in third and fourth tier cities rose substantially versus March; prices also ticked up.

So in spite of previously poor data for mid-cap names - including rights issues and China's first corporate dollar debt default from developerKaisa - smaller companies are outperforming: Hopson and Greenland, for instance, have nearly doubled in recent weeks.

The run could continue. Many mid-caps, such as Franshion and Greentown and China Overseas Grand Oceans, still trade below historic book values. As shares rise, bargain-hunting investors should keep a watchful eye on city-specific pricing and inventory trends. Seasoned estate agents know: property is all about location, location, location.

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