Zhitong Finance and Economics app learned that Bank of America stated that despite being more optimistic about supply-side policies (such as repurchasing idle land), the recent weakness in real estate sales (from high levels) indicates the need for more supportive demand-side measures, especially against the backdrop of uncertainties in the economic growth due to trade tensions. Bank of America believes that with the expected GDP growth in 2025, real estate policies are likely to be further intensified. The industry is currently trading at 7 times the expected 2025 P/E ratio, more than one standard deviation below the historical average; the bank sees room for P/E expansion if stable urban housing prices can be achieved.

Based on the latest sales trends and lower weighted average cost of capital (based on observed beta values and policy support), the discounted cash flow (DCF) model has averaged a 15% upward adjustment in stock prices. Due to easing liquidity pressures, Bank of America has upgraded the rating of Shimao Services (00873) to 'Neutral', but due to limited growth/dividends, the bank downgraded the rating of China Overseas Development (00688) to 'Neutral'. Bank of America's preferred symbols are China Res Land (01109) and Longfor Group (00960), while Yuexiu Property (00123) is preferred for mid-small cap stocks. In the property management sector, China Res Mixc (01209) is Bank of America's top choice.

Policy: Stability or Stimulus?

Bank of America states that so far, the objective of real estate policies seems to be stability rather than stimulating the real estate market. However, unless the central government shifts towards a more stimulating stance (by relaxing some terms of destocking and urban renewal policies), local governments may not have sufficient motivation to implement these real estate policies. The next key real estate policy measure may be approving quotas for Local Government Special Bonds (LGSB) (earliest possible in December 2024) to fund repurchases of idle land/inventory (Bank of America expects it to reach 500 billion yuan).

Divergence Will Become a Norm

Bank of America has adjusted its forecast for national sales volume/sales in 2025 to decline by 4-6%/8-10% (previously a single-digit percentage decline). While Bank of America believes that urban housing prices in first-tier cities may stabilize in the second half of 2025, second-tier cities may take longer to bottom out, and lower-tier cities' sales volumes may face structural challenges; regional performance disparities in the future may become the new norm.

Bank of America expects inventory months in first-tier cities to decrease from 25 months in mid-2024 to a healthy level of 12 months by the end of 2025, but national inventory may still remain above 20 months. Preliminary estimates indicate that national new home sales volumes are expected to stabilize by the end of 2026.

Revised forecast for the financial years 2024-2026.

Stability may help profit for the financial year 2027. Bank of America lowered the earnings per share forecast for the financial years 2024-2026 by 8-11%, and expects a year-on-year decline of 11%/7% in profit for the financial years 2024/2025. Bank of America expects state-owned developers' contract sales to remain basically flat in the 2025 financial year. The stability of sales and profit margins from existing homes (due to declining land prices) may lead to a profit rebound in the 2027 financial year (booking lag); although profits for the financial years 2024-2026 may still be weak, Bank of America expects investors to book early. Bank of America believes that, except for China Overseas Development, the profit prospects of Chinese property management companies remain basically unchanged. Bank of America revised the revenue ratings of Hangzhou Binjiang Real Estate Group, Poly Property Services, and Yuexiu Property from 7 (flat or higher) to 8 (flat or lower).

This article is excerpted from a Bank of America report; edited by Chinatimes Finance: Wenwen.