The real estate sector hit bottom and rebounded, with the US Federal Reserve lowering interest rates by 50 basis points at its September monetary policy meeting, exceeding market expectations. The Hong Kong stock market's real estate sector continued to rise.

According to the Wisdom Financial APP, on September 19, the Fed cut interest rates by 50 basis points, lowering the target range to 4.75%-5%, exceeding the market's expected 25 basis points. Fed Chairman Powell stated that a 50 basis point rate cut is not indicative of a recessionary rate cut or the pace of future rate cuts; downside risks to employment are increasing, inflation risks are receding, but the fight against inflation is not yet complete, and decisions will continue to be data-dependent.

In fact, the Fed's monetary policy has a significant impact on Hong Kong's capital markets. With Hong Kong adopting a linked exchange rate system as an international financial market, exchange rate trends directly affect capital flows. The US interest rate hiking cycle began in mid-March 2022, with 11 rate hikes totaling 5.25%, coupled with poor earning effects, leading to long-term liquidity depletion in the Hong Kong stock market. This rate cut is seen by the market as the start of the Fed's rate-cutting cycle, offering a good buying opportunity for Hong Kong stocks.

The real estate sector is not only influenced by liquidity, but the industry is currently in a downturn, which has somewhat suppressed sector valuations. A bottoming-out rebound and investment opportunities still require support from the industry's fundamental recovery.

The industry is in a downturn phase, but the darkest period has passed.

Looking at the development of the real estate industry, before 2016, benefiting from policies and continuous price increases, industry demand maintained double-digit growth rates. However, starting in 2017, the industry entered a slow development period lasting 5 years, with growth rates continuously slowing down. The Evergrande default event intensified industry restructuring. In 2022, industry defaults were frequent, formally entering a recession period, entering a negative growth era, and has been in continuous decline for three consecutive years.

In the first 8 months of this year, real estate demand has been very low. With ongoing international conflicts, concerns about risks, a decrease in marriage rates leading to a reduction in rigid demand, and a pessimistic outlook on the macro economy, the public has suppressed real estate consumption, with an unprecedented increase in the desire to hold cash, leading to explosive growth in deposits. By August 2024, the real estate industry's sales area and sales amounted to 0.606 billion square meters and 5.97 trillion yuan respectively, down by 23.6% and 18% year-on-year.

There is a severe overcapacity in the real estate sector, destocking remains the main theme in the medium term. According to the China Index Research Institute, as of July 2024, the national residential "started but unsold inventory" is 2.52 billion square meters. In terms of the clearance cycle, the current clearance cycle for "started but unsold inventory" is approximately 3.4 years, with significant pressure to clear. The most important demand continues to be sluggish, and the price decline has caused more rigid demand groups to adopt a wait-and-see attitude, which may lead to an unfavorable clearance cycle.

On the policy front, the central bank has cut reserve requirements and interest rates, commercial banks are providing financial support to homebuyers and the real estate sector. Both the supply and demand sides are making continuous efforts, but the effects need time to materialize. On the market side, the dual development system of "indemnificatory apartments and commercial properties" is stirring up the industry market, with state-owned enterprises reshaping the industry landscape: first, inventory acquisition is a direct means of destocking, which is accelerating nationwide and eliminating outdated real estate enterprises; second, increasing the supply of indemnificatory housing to stabilize prices, ensuring the stable development of real estate and implementing the "housing is for living, not for speculation" policy.

According to the China Index Research Institute's monitoring, by the end of August 2024, approximately 30 cities have issued announcements for the collection of commercial properties for use as indemnificatory apartments. In terms of progress, for example, in August, the first project in Wuhan was officially launched, providing more than 500 sets of indemnificatory rental housing for the entire city; Chongqing held a signing ceremony for the second batch of acquisitions of completed existing commercial properties for use as indemnificatory housing, with 7 projects providing over 2600 sets of indemnificatory housing after transformation.

With several leading companies in various industries facing financial difficulties, even Vanke has not escaped the industry crisis. However, with efforts from various sides, it is still struggling to maintain healthy finances. The market will gradually clear, and the darkest period of the real estate sector has passed, with dawn perhaps right in front of us.

There is significant differentiation in the industry, with resilient quality real estate enterprises standing out.

Although the real estate industry is going through an unprecedented dark period, with most real estate companies suffering huge losses, there are still some high-quality real estate companies maintaining profitability. Looking at the financial reports for the first half of 2024, for example, in terms of leading companies, China Resources Land (01109) achieved a contra-cyclical revenue growth of 8.44%, with a net income of 10.253 billion yuan, while Longfor Group (00960) saw a decline in revenue but still achieved a net income of 5.866 billion yuan.

On the other hand, Vanke, once the industry leader, saw its revenue decline by 28.9% in the first half of the year, with a shareholder net loss of up to 9.852 billion yuan; China Evergrande experienced a bottom-up revenue rebound, but incurred a huge loss of 33.012 billion yuan, and Sunac China's revenue decreased by 41.4%, with a shareholder net loss of 14.96 billion yuan. In addition, some medium and small real estate companies are also showing differentiation, with both Zhongliang Real Estate and R&F Properties experiencing declining revenues and recording losses.

As of the first 8 months of this year, looking at the sales data disclosed in Hong Kong stocks, Vanke, China Overseas Land & Investment, China Resources Land, Longfor Group, and Greentown China are the top five in sales in Hong Kong. Vanke's sales area and sales volume were 12.076 million square meters and 163.78 billion yuan respectively, down by 25.7% and 34.1% year-on-year, with an average price decline of 11.4%. The other four all experienced varying degrees of decline, but some maintained performance resilience by improving prices through product quality enhancement, such as China Resources Land, whose sales in August remained stable, and the average price from January to August was 26,900 yuan per square meter, up by 19.2% year-on-year.

The performance of major real estate companies has been fully reflected in the capital markets. Although China Resources Land's valuation has retreated in recent years, it remains well below the industry decline, indicating a long-term bullish trend and becoming a bright spot in the real estate sector. Vanke started its decline in 2020, dropping from a high of 36 Hong Kong dollars to less than 5 Hong Kong dollars now, with a market cap shrinking by as much as 86%. Sunac's stock also dropped from 46.2 Hong Kong dollars to below 1 Hong Kong dollar, currently priced at 1.04 Hong Kong dollars, with a market cap shrinking by a staggering 97.8%.

As mentioned earlier, the darkest period for real estate has passed, both in terms of physical operations and capital markets hitting the bottom. With the dampening of bearish sentiments, funds will be very sensitive to any bullish news. So, under the sector opportunities, which real estate company will have the opportunity for valuation correction?

The Fed's rate cuts have triggered effects, focusing on valuation repair opportunities.

In fact, the most direct impact of the Fed's rate cuts on the Hong Kong stock market is capital inflow. The Hang Seng Index has seen an influx of incremental funds, driving a rebound in the real estate sector. Real estate is highly sensitive to interest rates, and the Fed's rate cut is expected to trigger a series of rate cut effects. As central banks around the world implement loose monetary policies, the impact on the real estate sector from financial markets will translate into the physical market, and the improvement in industry fundamentals will further drive sector valuation correction.

Firstly, there is Vanke with severely reduced valuation. Currently, Vanke's PB ratio is only 0.3 times. The main issue currently lies in the drag from its development business. However, non-development business including property management, long-term rentals, and commercial segments are showing continuous revenue growth, expected to reverse the business trend. Additionally, the company's debt issues are gradually being mitigated, with an interest-bearing debt amount of 331.3 billion yuan as of 2024, and cash and cash equivalents of 92.4 billion yuan.

The company focuses on cash flow security, delaying land acquisition pace, with the massive loss in the first half of the year more influenced by asset/credit impairment. It is expected to see significant improvement in the second half of the year. Under the policy of reducing inventory and holding cash, financial pressure is expected to decrease. As long as there are no financial issues with the company, Vanke remains the industry leader. With its current debt repayment capability and government support, the probability of following in Evergrande's footsteps is low, and it continues to receive positive outlook from major institutions.

Next are high-quality real estate companies, including China Resources Land and Longfor Group. Taking China Resources Land as an example, the sales resilience of the development business remains strong. Although overall sales in the first half of the year declined due to market impact, the structure improved. As of June, the company's contracted sales amounted to 321.4 billion yuan, with 166.1 billion yuan planned to be settled in the second half of 2024, representing 50.6% of the initial inventory at the beginning of the year.

From 2024 to 2025, China Resources Land's settlement area is expected to be around 32.5 million square meters, with 82% located in first and second-tier high-energy cities. The company's rich high-quality resources ensure high-quality and stable performance growth. As of June 2024, the company's total interest-bearing debt ratio was only 38.9%, significantly lower than the industry average. Its cash-to-short-term debt ratio is 1.54 times, and its financing reserve-to-short-term debt ratio is 1.38 times, demonstrating strong financial security capabilities that outperform peers.

In conclusion, the inflection point in the real estate sector valuation may be approaching, but there are still certain risk factors, such as lower-than-expected industry demand. Investors can focus on investment opportunities in high-quality real estate companies.