The rebound in the secondary housing market fails to mask underlying fundamentals, and with property stocks trading at elevated valuations, caution is warranted.

Overview

Morgan Stanley released a report examining whether the recent rebound in secondhand home sales in China’s property market signals a genuine industry inflection point. The report notes that, despite a stronger-than-expected pickup in secondhand transaction volumes in key cities since March, the sustainability of this recovery remains uncertain, given limited improvements in macroeconomic fundamentals, divergent trends between new‑ and secondhand housing markets, subdued household income expectations, and persistent high inventory pressures. The firm believes that current equity valuations in the real estate sector have already fully priced in optimistic assumptions about sustained sales growth, leaving valuations at historically elevated levels and tilting the risk‑return profile to the downside. Accordingly, investors are advised to exercise caution during the critical observation period from May to August, awaiting clearer signs of a durable recovery, while selectively allocating to high‑quality stocks that combine sector beta with strong idiosyncratic alpha—such as China Resources Land and Gemdale Corporation.

Core views

Structural Characteristics and Underlying Concerns Behind the Sales Rebound: In March and April, real-time secondhand home transaction volumes in the 25 major cities tracked by our analysts rose 17% and 30% year over year, respectively, driving a cumulative year-over-year increase of 14% for the first four months. This robust performance was partly fueled by pent-up demand released after the Spring Festival, policy easing in first-tier cities, and a low base effect. However, the new-home market told a markedly different story: new-home sales declined 16% year over year in March and grew only 4% in April, signaling a shift in market dynamics from new to existing homes. This “volume up, prices down” pattern—concentrated in smaller units and lower‑priced properties—reflects a strong preference among刚需 buyers for value rather than a broad-based recovery in upgrade‑type demand. Moreover, sellers of existing homes have become more willing to cut prices, with over 60% of potential sellers now open to selling at a loss, which will continue to weigh on housing prices. Fundamental Constraints on the Sustainability of the Recovery: The report underscores several structural factors that limit the market’s ability to sustain self‑reinforcing growth. First, household income expectations and the labor market remain subdued; the non‑manufacturing PMI employment index continues to weaken, leading to higher savings rates and elevated leverage (exceeding 60% of GDP), thereby prompting more cautious home‑buying decisions. Second, although rental yields have improved to around 2.7% thanks to falling home prices, they still lag behind mortgage rates in many cities, while rents themselves remain on a downward trajectory, diminishing the investment appeal of real estate. Third, new‑home inventory is being cleared slowly, with an average absorption period of 32 months across 70 major and medium-sized cities—far above historical norms—while secondhand listings are beginning to rise in some markets, leaving supply‑demand imbalances largely unchanged. Overvalued Valuations and Limited Earnings Prospects: As of mid-May 2026, Chinese property stocks have gained roughly 10% since late April, with state‑owned developers posting an average gain of 21%, outpacing their private‑sector peers. Current forward price‑to‑earnings (P/E) and price‑to‑book (P/B) multiples—12.8x and 0.45x, respectively—are already elevated, particularly for state‑owned developers, whose valuations imply P/E ratios as high as 4.5 times their historical peak core earnings. This premium exceeds institutional forecasts for 2028 earnings by more than 2.5 times. Given developers’ constraints on leverage, increasingly homogeneous land‑acquisition strategies, and lingering inventory burdens, it is unlikely that their near‑term sales, profit margins, or return on equity (ROE) will rebound to pre‑downward‑trend levels. Consequently, current valuations may be overly optimistic, and if sales fail to sustain strong growth, share prices could face downside risks. Stock Recommendations and Strategic Approach: Based on these considerations, Morgan Stanley advocates a balanced approach, focusing on developers with ample salable resources—especially newly acquired high‑tier urban land reserves for 2024–2026—sound financial positions, and defensive characteristics. Our top pick is China Resources Land (1109.HK), which boasts high‑quality land holdings in first- and second‑tier cities, rising recurring revenue contributions, and attractive valuation metrics. Next is Gemdale International (1908.HK), benefiting from highly efficient operations and limited exposure to legacy projects, with core earnings expected to post double-digit growth and a dividend yield of 6–7%. We assign a neutral rating to China Overseas Development (0688.HK) and China Jinmao (0817.HK), as their valuations already reflect reasonable growth expectations. Meanwhile, we maintain underweight ratings for Vanke A, Goldin Group, and Greentown China, citing weaker land‑reserve quality, challenging inventory digestion, and stretched valuations.

Analysis framework

Institutional analysts have employed a combined approach that integrates “volume–price decomposition” with a supply–demand framework to assess the current market dynamics. First, by comparing sales data for new and existing homes, they identify structural divergences within the market, noting that the robust demand for second‑hand properties has failed to translate into the new‑home segment and has instead given rise to a substitution effect. Second, they conduct an in‑depth analysis of the key determinants of demand, including household income expectations—supported by PMI employment indices and consumer spending data—rental market conditions—evidenced by the inversion between rental yield and mortgage rates—and inventory levels—measured through the sales absorption period—thereby demonstrating that the recent rebound lacks solid fundamental underpinnings. Finally, using relative valuation metrics (P/E, P/B, EV/Pre‑sales) and historical cycle comparisons (the 2013–15 cycle and Hong Kong’s recent recovery), they evaluate whether the price multiple embedded in current stock valuations is justified, concluding that valuations are elevated and selective stock picking is warranted.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-and-Demand Framework

  By analyzing the divergence between new-home and existing-home sales, the inventory absorption period, and rental yield, we can assess the market’s supply-demand equilibrium.

  The research report notes that while secondhand‑home sales have surged, new‑home sales remain sluggish and inventories remain elevated, underscoring persistent supply‑side pressures. Meanwhile, falling rents and uncertain income expectations are dampening effective demand, prolonging the rebalancing of supply and demand and ruling out a V‑shaped recovery.

• Valuation MethodologyPE/PEG valuation

  We use the forward price-to-earnings ratio (Forward P/E) and the enterprise value to pre-sales multiple (EV/Pre-sales) to assess developers’ valuation levels.

  The research report finds that the current market capitalization of state-owned property developers implies extremely high price-to-earnings multiples relative to their historical peak profits, far exceeding forecasts for normalized future earnings, suggesting that market sentiment is overly optimistic and valuations carry bubble risks.

• The Cyclical and Economic Outlook FrameworkBusiness Cycle Turning Point Analysis

  By comparing the current recovery trajectory with historical cycles—such as the 2013–2015 period—and with that of comparable markets, such as Hong Kong, we can determine whether we are indeed at a genuine inflection point in the economic cycle.

  A review of historical research reports reveals that a genuine price recovery typically hinges on sustained improvements in sales volumes over several consecutive months. Moreover, the current macroeconomic backdrop—characterized by demographic trends and leverage levels—is markedly weaker than in the previous cycle. Accordingly, we conclude that the present move is likely a technical rebound rather than a long-term inflection point.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Resources Land (1109.HK)

  Top-tier beneficiaries

  Strengths

  The company’s land reserves in first- and second-tier cities account for over 50%, with ample new deliverable value expected from 2024 to 2026. Recurring income, including rental revenue, is projected to reach 60% by 2028, providing defensive resilience. Valuation remains attractive, at approximately 10x forward P/E.

  Comparison

  Compared with other state-owned enterprises, it boasts superior commercial operational capabilities and higher-quality land reserves, resulting in stronger risk resilience.

  Risks

  New-home sales fell short of expectations; mall openings have progressed more slowly than anticipated.

• C&D International (1908.HK)

  Secondary beneficiaries

  Strengths

  High-tier cities boast substantial land reserves (over 20% in first-tier cities and 35% in strong second-tier cities); the company exhibits high operational efficiency and carries a light legacy‑project burden. Core earnings are expected to post a CAGR of 10–15% from 2026 to 2028, with a dividend yield of 6–7%.

  Comparison

  Compared with purely development-focused property developers, companies with a supply-chain background enjoy distinct advantages in cost control and operational turnover efficiency.

  Risks

  Gross margin expansion fell short of expectations; land acquisition pace was slower than anticipated.

• Vanke A (000002.SZ) / Gemdale Corporation (600383.SS)

  Underperforming/Underweight Stocks

  Weaknesses

  Land reserves are of relatively low quality or face challenges in sales absorption; the company is under significant liquidity or profitability pressure; its valuation is elevated relative to its underlying fundamental risks.

  Comparison

  Compared with China Resources and C&D, it has a smaller pipeline of high-quality new projects in top-tier cities and is more heavily weighed down by impairment charges on legacy projects.

  Risks

  Sales continue to deteriorate; financing channels are tightening.

Key data

• Year-on-Year Growth Rate of Secondhand Home Sales in 25 Cities (April)+30%In March, the figure stood at +17%, while the cumulative growth for the first four months reached +14%, significantly exceeding expectations.
• Year-on-Year Growth Rate of New Home Sales in 25 Cities (April)+4%In March, the figure stood at -16%, significantly underperforming the existing-home market.
• Average Sales Clearance Period for New Homes in 70 Cities (March)32 monthsIn first-tier cities, the figure stands at 23 months; in second-tier cities, 30 months; and in third-tier cities, 42 months—each at historically high levels.
• State-owned enterprise developers’ implied P/E (based on historical peak earnings)4.5xMore than 2.5 times higher than the P/E ratio implied by institutional analysts’ 2028 earnings forecast.
• 2026 Full-Year Forecast for Commercial Residential Sales AreaYear-on-year flatThis represents an upward revision of 3–4 percentage points from the previous forecast, largely attributable to the low base effect in the second half of the year.

Impact & implications

The research report argues that the current “early spring” recovery in the real estate market is primarily driven by secondhand‑home transactions, concentrated in lower‑priced properties. For developers whose core business is new‑home sales, this dynamic offers limited upside and may even weigh on their prospects, as secondhand‑home activity siphons demand away from the new‑home segment. From an investor’s perspective, the recent rally in property stocks—particularly state‑owned enterprises—already reflects relatively optimistic expectations for a sales rebound. However, if sales data over the next few months (May–August) fail to confirm a broad-based improvement in fundamentals, share prices could come under pressure from profit‑taking. This suggests that investment strategies should shift from betting on sector beta to uncovering idiosyncratic stock‑specific alpha. Key focus should be on leading central state‑owned enterprises that hold high‑quality, newly acquired land reserves in first- and second‑tier cities, maintain robust financial buffers, and generate stable cash flows through operating income streams such as rental income.

Risks

• Consumer sentiment has rebounded faster than expected, creating a positive feedback loop between sales and prices.
• The central government has introduced fiscal support that exceeds expectations or may further implement substantial interest-rate cuts.
• The robust sales of existing homes have successfully spillovered into the new-home market, boosting developers’ inventory destocking and improving their profit margins.
• A surge in the number of secondhand homes listed for sale has intensified price competition, further undermining homebuyers’ confidence.
• Deteriorating macroeconomic conditions have led to a further decline in rental yields, accelerating the fall in housing prices.

What to watch

• During May to August, the number of visits to sales offices—known as “visitation”—serves as a leading indicator of secondhand home sales.
• Changes in the volume of secondhand homes listed for sale and the room for price negotiation reflect sellers’ sentiment.
• If rental rates reverse their downward trend and begin to rise, it will help stabilize home-price expectations.
• Changes in the transaction structure—specifically, whether the share of large- and medium-sized home sales has increased—can help determine whether demand from home-upgraders is taking over.