At the beginning of 2021, John Lam, an analyst in charge of real estate research at UBS Greater China, gave a rare sales rating to China's Evergrande Group, which shocked the market at one point. A few months later, Evergrande officially stormed, proving John Lam's foresight.

Now, the analyst has begun to change direction, predicting that the Chinese real estate market will gradually recover at a time when many people still have doubts about the Chinese real estate industry.

UBS is beginning to be optimistic about China's real estate industry

Recently, in an interview in Hong Kong, John Lam said, “After three years of bearishness, we have become more optimistic about China's real estate industry for the first time due to government aid.”

He anticipates that domestic housing demand and supply will return to historical averages sometime next year, and the stocks of major Chinese real estate developers may rebound. In January of this year, he raised the ratings of several real estate companies, including Longhu Group Holdings, to buy.

Lam graduated from the Hong Kong University of Science and Technology and worked at Morgan Stanley for a while.

In January 2021, John Lam downgraded Evergrande's rating and lowered the target price from HK$14.50 to HK$6. He became the only one of 19 analysts who followed Evergrande at the time to give the company a sales rating and lowered the target share price below the stock price in the market at the time.

His actions caused an uproar in the market at the time, but then his concerns were quickly confirmed: Evergrande's stock price began to plummet by more than 90% in April of that year, thunderstorms occurred in the second half of that year, and trading was suspended 14 months later.

But now, John Lam believes China's real estate industry is preparing for a slow recovery after a few painful years.

Has the dawn appeared?

Although John Lam predicts that sales and prices in China's real estate industry will not rise this year, the decline will ease somewhat.

In terms of area, he believes domestic residential sales may fall 7% this year, down from the 27% drop recorded in 2022. The rate of new housing starts is likely to drop by 7%, which is narrower than the 39% drop in 2022. Meanwhile, housing prices in first-tier and second-tier cities are likely to fall by 10%.

Lam also predicted: “Once housing prices stabilize, we think pent-up demand will return as the real estate price decline cycle over the past three years has caused people to delay purchases.”

John Lam also mentioned that oversupply has been reduced as many real estate businesses have stopped buying land and building homes. During the downturn in the property market, new housing starts by Chinese developers fell 58%, far higher than the 37% drop in real estate sales by area during the same period. Lam believes that this kind of “de-inventory” may cause the domestic housing inventory level to drop significantly.

Is the Chinese real estate market healthier than Japan?

In the recent real estate crisis, many people will think of the bursting of the housing bubble in Japan and the US before.

In fact, it took Japan about 15 years to break out of the massive housing bubble in the early 90s of the last century, while it took the US about 6 years to recover from the subprime mortgage crisis. Currently, housing prices in mainland China have dropped nearly 20% from their peak, far from the 70% drop after the collapse of the Hong Kong property market bubble in 1997.

John Lam believes that the real estate market in mainland China is healthier than Japan and Hong Kong, and the extent of the crisis is less serious than the latter two. The reason for this is that China's urbanization rate and household leverage ratio are low, and strict foreign exchange controls have combined to enable China to manage the housing bubble better than Japan.

Lam said, “We should expect real estate prices and new construction rates to stabilize by June 2025. Currently, the biggest debate is the macro-question of how to recover buyer demand.”

Editor/Jeffrey