Chinese real estate drawdown in March softened, but the sustainability of recovery remains in doubt

Overview

The report focuses on China real estate sector data for March 2026. Morgan Stanley notes that in March, declines in residential sales, house prices, and construction activity had eased compared with earlier periods, but this improvement was driven more by a low base, Spring Festival calendar effects, and stronger secondary home transactions in some Tier 1 cities, rather than a fundamental recovery taking hold. The firm maintains an In-Line sector view and expects the sector will still face underperformance pressure in 2Q26.

Core views

The core view is that "the pace of decline may continue to narrow, but sustainability is insufficient." In March, year-on-year declines in nationwide sales value and area narrowed, and the 70-city index of month-on-month price declines also became smaller, with second-hand transactions in Tier 1 cities performing relatively stronger; however, high inventories, weak buyer confidence, reactive rather than forward-looking policy, and continued divergence in Tier 2 and lower-tier cities all constrain recovery quality. At the investment level, the report recommends staying with an alpha framework, favoring strong mall operators and C-REIT candidates, as well as residential consolidators with clear paths to margin and earnings recovery.

Analysis framework

The report mainly uses re-based NBS real estate data, the 70-city house price index, city-tier secondary market observations, the AlphaWise homebuyer sentiment survey, and a developer NAV valuation framework to assess sector trends and the relative attractiveness of stocks.

Methodology notes

• Valuation methodsNAV discount method

  Developer NAV valuation

  Apply DCF to development properties and capitalization rate to investment properties, and impose a 30%-45% discount based on scoring across land bank, execution, scale, growth, profitability, financing, and leverage.

• Sector viewIndustry View

  In-Line

  Morgan Stanley believes sector performance over the next 12-18 months will be broadly in line with the relevant regional benchmark, but in the near term the sector may still be pressured by weaker prices and fragile sentiment.

• Stock ratingRelative rating framework

  Overweight / Equal-weight / Underweight

  Ratings reflect expected risk-adjusted total return over the next 12-18 months relative to the average level of the industry covered by the analysts, and are not equivalent to traditional buy/hold/sell recommendations.

Asset mapping & comparison

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

• China Resources Land Ltd. (1109.HK)

  Priority preferred name, strong mall operator, with C-REIT upside potential

  Strengths

  High investment property value, stronger financing and leverage scores; on the developer scorecard, it ranks high on land bank, execution, scale, growth, and profitability.

  Weaknesses

  Still exposed to contracted sales, mall opening pace, and industry property-price sentiment.

  Comparison

  Uses a 30% NAV discount versus peers, at the lower end of the 30%-45% discount band, indicating relatively higher quality.

  Risks

  Upside risks include stronger-than-expected contracted sales and faster opening of new malls; downside risks include weaker-than-expected contracted sales and slower-than-expected mall openings.

• C&D International Investment Group Ltd (1908.HK)

  Priority preferred name, residential consolidator, with clear margin and earnings recovery path

  Strengths

  The report sees it as having a visible path for margin and earnings recovery, with a generally strong overall developer score.

  Weaknesses

  The business is more reliant on development property and remains exposed to volatility in residential sales and gross margins.

  Comparison

  Uses a 35% NAV discount, with quality below CR Land but still on the recommended alpha list.

  Risks

  Upside risks include stronger-than-expected contracted sales and gross margins; downside risks include weaker-than-expected gross margins and slower-than-expected land acquisition.

• Seazen Holdings Company Ltd. (601155.SS)

  Priority preferred name, strong mall operator, with potential C-REIT/private REIT exit logic

  Strengths

  Relatively large stock of investment property and room to improve through new investment property openings and operations.

  Weaknesses

  Land bank, scale, growth, and profitability scores are below CR Land, with a higher NAV discount.

  Comparison

  Uses a 40% NAV discount, which is toward the higher discount end of the coverage set, reflecting larger risk and quality discount.

  Risks

  Upside risks include stronger-than-expected contracted sales, new investment property launches and operations, and faster-than-expected land purchases; downside risks include faster-than-expected compression of development margin, weaker-than-expected recurring income growth, and slower-than-expected private REIT placement into malls.

Key data

• March nationwide sales valuey/y -13.3%Narrowed from -20.2% in the first two months of 2026.
• March nationwide sales areay/y -7.4%Narrowed from -13.5% in the first two months of 2026.
• March 70-city primary housing priceMoM -0.2%In February it was -0.3%, and the decline has narrowed.
• March 70-city second-hand housing priceMoM -0.2%In February it was -0.4%, and the decline has narrowed.
• Tier 1 city house pricesPrimary MoM +0.2%, second-hand MoM +0.4%Supported by strong second-hand turnover, outperforming other city tiers.
• March real estate investmenty/y -11.3%Slightly worse than -11.1% in the first two months of 2026.
• March new starts areay/y -17.4%Narrowed from -23.1% in the first two months of 2026, but absolute performance remains weak.
• March completed areay/y -19.1%Narrowed from -27.9% in the first two months of 2026.
• China Resources Land Ltd. 2026e NAVHK$56.20/share, 30% discountComposed of development property, investment property, and net debt, with relatively strong scoring.
• C&D International Investment Group Ltd 2026e NAVHK$28.90/share, 35% discountDevelopment property is the main component, with attention on margin and earnings recovery path.
• Seazen Holdings Company Ltd. 2026e NAVRmb35.84/share, 40% discountIncludes development property, investment property, and net debt; the higher discount reflects weaker scoring.

Impact & implications

For investors, sector beta improvement still lacks strong confirmation, and the short-term rebound is more likely driven by a low base and localized city trading rather than broad recovery. The implied positioning implication is to reduce dependence on overall sector recovery and tilt toward stocks with operating assets, REIT exit optionality, financing resilience, or margin recovery capability.

Risks

• High inventories may continue to pressure new-home sales and prices.
• Buyer sentiment is fragile, and AlphaWise data shows sentiment deterioration.
• Policy stance is reactive, and recent effects of HPR measures may weaken.
• Second-hand listing volumes and asking prices continue to deteriorate in Tier 2 and lower-tier cities, with widening divergence across cities.
• Developers remain cautious on land acquisition, so construction and investment activity may remain muted through 2026.
• If house prices weaken again, sector sentiment could remain pressured, causing underperformance in 2Q26.

What to watch

• Whether year-on-year declines in 2Q26 sales value and sales area continue to narrow.
• Whether the strength in Tier 1 secondary-market transactions can spread to broader demand beyond lower-ticket transactions and rental-yield-driven demand.
• Changes in listing volume, asking prices, and liquidation cycles in Tier 2 and lower-tier cities.
• Whether homebuyer confidence and AlphaWise survey indicators improve.
• Whether policy shifts from reactive easing to more forceful, forward-looking support.
• Progress on key developers' contracted sales, gross margins, mall openings, and REIT exits.