Morgan Stanley: June Second-hand Home Sales Plummet, Industry Risk Leans Downside

Overview

Morgan Stanley released a follow-up report on China's real estate sector, highlighting renewed weakness in the second-hand home market following a brief rebound. As of June 10, the year-on-year growth rate of real-time second-hand home sales in 25 key cities slowed significantly to 9.2%, well below levels seen in April and May. The report confirms prior assessments regarding diminishing policy effects and the exhaustion of pent-up demand, projecting that sales year-on-year growth could turn negative in the third quarter. Although the sector's stock price has already corrected by 18% since mid-May, institutions maintain that the overall industry risk-reward profile leans to the downside. They advise investors to remain prudent and focus on top-tier central state-owned enterprises that possess both industry Beta and own-stock Alpha advantages.

Core views

Sharp Cooling in Sales Data: High-frequency data shows that year-on-year growth in real-time second-hand home sales for 25 sample cities plummeted from 30% in April and 26% in May to just 9.2% in early June (as of June 10). Even accounting for the low base effect of the Dragon Boat Festival holiday, this decline is significant, indicating insufficient internal market momentum. Differentiation by City Tier and Policy Effects: Sales deceleration was fastest in lower-tier tier-2 cities (such as Nanchang, Foshan, Nantong, Dongguan, Ningbo, and Xi'an), while cities like Tianjin, Changsha, and Chengdu have already seen year-on-year growth turn negative. Among cities that introduced easing policies at the end of April, Suzhou and Wuhan maintained relatively robust growth. However, sales growth rates in Guangzhou, Shenzhen, and Foshan fell by double-digit percentage points, raising questions about the sustainability and universality of policy stimulus effects. Price Trends and Mid-term Outlook: The report maintains its baseline forecast of modest monthly declines in housing prices for 2026-2027. It suggests that as policy effects fade and pent-up demand is exhausted, there is a risk of year-on-year sales turning negative in the third quarter. However, some first-tier cities with better progress in inventory destocking may experience slight upward price trends, leading to structural differentiation in the market. Stock Selection Strategy Focused on Alpha: Given increased uncertainty regarding sales sustainability, the report recommends continuing a selective allocation strategy. China Resources Land (1109.HK) remains the top pick, followed by C&D International (1908.HK). Both companies not only have robust earnings per share prospects and attractive dividend yields but also possess potential for mid-term revaluation. They can deliver relative returns even if the underlying physical market does not see an obvious recovery.

Analysis framework

The report adopts an analytical framework of 'high-frequency data tracking + policy effect attribution'. First, it utilizes Bingshan 25-city second-hand home real-time transaction data as a leading indicator to capture marginal market changes. Second, cities are grouped by tier and policy implementation timing for comparative analysis to isolate natural cycles from policy interventions. Finally, by combining multi-dimensional indicators such as existing home listing volume, rental yield, and transaction structure, the report comprehensively assesses whether a true turning point has formed. This method of deriving macro-sector trends from micro-high-frequency signals helps identify risks ahead of lagging official monthly net signing data.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Second-hand home real-time sales as a leading property market indicator

  Compared to new home net signing data, second-hand home real-time transactions better reflect residents' genuine purchase intentions and market temperature. By tracking daily/weekly data for second-hand homes across 25 cities, the report captures the attenuation of sales momentum 2-3 weeks earlier than official monthly statistics. This serves as a core high-frequency signal for judging short-term business conditions.

• Valuation MethodNAV Net Asset Value Method

  Developer NAV valuation and scoring card discounting

  The report employs NAV valuation methods for China Resources Land and C&D International. It calculates the value of developed properties using DCF discounting and investment properties using capitalization rates. A 30%-35% discount is then applied based on a scoring card covering dimensions such as land reserves, execution capability, scale, and financing costs. This approach is suitable for property developers with heavy assets and long project cycles, providing a more realistic reflection of their underlying asset values.

Asset mapping & comparison

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

• China Resources Land (1109.HK)

  Top Pick, possessing both industry Beta and own-stock Alpha

  Strengths

  Stable EPS outlook, attractive dividend yield, mid-term revaluation potential, perfect financing and leverage score (10/10)

  Comparison

  Highest rated among covered developers; lowest NAV discount rate (30%)

  Risks

  Contracted sales falling short of expectations; new mall openings slower than anticipated

• C&D International Holdings (1908.HK)

  Secondary Pick, also possessing Alpha attributes

  Strengths

  Solid earnings outlook, high dividends; 35% NAV discount reflects a reasonable safety margin

  Weaknesses

  Profitability score slightly lower than China Resources Land (7/10 vs 8/10)

  Comparison

  Ranking right after China Resources Land, outperforming other peers

  Risks

  Gross margins falling short of expectations; land acquisition speed slower than anticipated

Key data

• Year-on-Year Growth Rate of Second-hand Home Sales in 25 Cities (Early June)9.2%Significant slowdown compared to 30% in April and 26% in May; MTD data as of June 10
• China Resources Land Target PriceHK$60.88Based on expected 2026 NAV, including a 30% discount
• C&D International Target PriceHK$32.59Based on expected 2026 NAV, including a 35% discount
• Sector Stock Price Correction Magnitude-18%Decline since mid-May; Hang Seng Index fell 8% during the same period

Impact & implications

The report argues that the weakening sales data implies that the recent rebound, driven by mortgage easing and sentiment recovery, may be merely a 'false start' rather than a true market turning point. For the real estate industry, this means fundamental pressure will persist throughout the second half of the year, and the trend of gradual price declines is unlikely to change. For investors, beta opportunities across the sector are limited, and excess returns will primarily stem from individual stock alpha attributes—namely, high-quality central state-owned enterprises that maintain profitability stability, cash flow security, and shareholder returns even during downturns.

Risks

• Sustainability of second-hand home sales falls short of expectations; year-on-year growth turns negative in Q3
• Policy stimulus effects further diminish; month-on-month housing prices continue to decline
• Declarations by developers slow down, leading to downward revisions in profit forecasts
• Slow recovery in commercial real estate operations affects valuations

What to watch

• Transaction volumes and price trends for second-hand homes from June to August
• Changes in the number of new second-hand listings
• Structural differentiation in trading across city tiers
• Changes in rental yields in key cities
• Whether a new round of substantive support policies will be introduced