China Real Estate Sales Weaken Again in May, Potentially Even Weaker in Q3

Overview

This Morgan Stanley report focuses on the latest data for China's real estate market in May 2026 and offers forward-looking insights into Q3 trends. Key findings include: sales weakened again in May, reversing earlier improvement trends, and Q3 prospects remain bleak. Against this backdrop, the firm advises maintaining caution and selective stock picking, highlighting China Resources Land and C&D International as companies possessing both 'sector beta plus self-rescue alpha'.

Core views

The report begins by analyzing the worsening May data. Nationwide commercial housing sales area dropped 13.2% year over year, with sales value down 9.3%, marking a significant expansion compared to April’s 9.5% and 7.6% declines. Year-to-date, sales area has fallen 10.8%, and sales value 13.5%. On the pricing front, the National Bureau of Statistics’ 70-city housing price index continued its modest decline, with new homes down 0.2% month over month and second-hand homes down 0.3%, though first-tier cities showed mixed results, with new and second-hand homes up 0.2% and 0.4% month over month, respectively, indicating structural resilience. Supply-side data also remained weak. New construction starts fell 25% year over year in May, while completions declined 20%, widening cumulative drops to 23% for both categories through the first five months. Real estate investment decreased 16.2% year over year in the first five months, worsening from the previous four months’ 13.7% decline. Developers’ land-acquisition appetite remains subdued, with top-100 developers seeing land-purchase spending plunge more than 40% year over year in the first five months, posing downside risks to full-year projections. Looking ahead to Q3, the report anticipates an even tougher environment. Real-time second-hand home sales in high-tier cities began weakening mid-May, accelerating sharply in recent weeks. With consumer confidence still fragile, policy effects fading, pent-up demand gradually dissipating, and dwindling available inventory, second-hand home sales are expected to turn negative year over year, while new-home sales will see further deepening declines, albeit from already low bases. Housing prices may show K-shaped divergence: overall month-over-month declines persist, but some first-tier cities could experience moderate increases due to progress in destocking or other factors. On the investment front, the report maintains a cautious stance. Despite the sector’s roughly 20% pullback since mid-May (compared to the Hang Seng Index’s 7% decline), uncertainty around sales sustainability remains elevated, keeping the sector’s risk-reward profile tilted downward. The firm recommends sticking to beneficiaries that combine sector beta with self-rescue alpha, with China Resources Land remaining the top choice and C&D International close behind.

Analysis framework

Morgan Stanley employs a three-tiered analytical framework: macro-data validation, forward-looking scenario modeling, and individual stock selection. The first tier validates current market conditions using monthly data from the National Bureau of Statistics—covering sales area, sales value, housing price indices, investment, new construction starts, and completions—and compares them to the previous month to assess trend direction. The second tier leverages high-frequency real-time home-sales data and patterns of waning policy effects to project Q3 outcomes, focusing on three key assumptions: consumer confidence, persistence of policy impacts, and supply constraints. The third tier screens for defensive yet growth-oriented stocks amid industry downturns, applying NAV (net asset value) valuation and incorporating a developer scorecard—evaluating landbank, execution, scale, growth, profitability, financing, and leverage—to determine valuation discounts and identify alpha-generating stocks capable of weathering cyclical pressures.

Methodology notes

• valuation methodNAV net asset value method

  NAV (net asset value method) is the core approach for valuing real estate developers.

  Under the NAV method, a developer’s value is broken down into three components—developable properties, investment properties, and net debt/cash—each separately valued and then summed, adjusted by personalized discount rates. In this report, China Resources Land’s NAV stands at HK$60.88 per share (developable properties HK$15.62 + investment properties HK$55.22 − net debt HK$9.96), while C&D International’s NAV is HK$32.59 per share. Target prices were derived after applying 30% and 35% discounts, respectively, based on the developer scorecard assessing land reserves, execution capabilities, scale, growth, profitability, financing, and leverage across seven dimensions.

• competitive and strategic frameworkMoat / competitive advantage

  Identifying companies with 'self-rescue alpha' during industry downturns.

  The report introduces the ‘sector beta plus self-rescue alpha’ framework, which prioritizes firms that maintain competitive advantages, proactively improve operations, and deliver outperformance beyond the broader industry trend (alpha). This analytical approach echoes the ‘moat’ concept, emphasizing the identification of companies with pricing power, financing strengths, or operational efficiencies to generate relative excess returns in adverse market conditions.

• industry/sector analysis frameworksupply-and-demand framework

  Analyzing the real estate market requires simultaneous attention to both demand-side factors—consumer confidence and policy stimulus—and supply-side factors—new construction starts, land acquisitions, and available inventory.

  The central thread of this report is dual weakness on both sides: demand-side factors such as fragile consumer confidence and diminishing policy effects; supply-side factors including cautious developer land acquisition and shrinking available resources. This supply-and-demand lens helps explain why sales might continue to deteriorate even when base levels are already low, and why certain first-tier cities exhibit price resilience due to better destocking efforts.

Asset mapping & comparison

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

• China Resources Land (1109.HK)

  Top pick, combining sector beta and self-rescue alpha

  Strengths

  Solid EPS outlook, attractive dividend yield, medium-term revaluation potential; high proportion of investment properties (HK$55.22 per share), providing stable cash flow; excellent developer scorecard scores (financing and leverage both 10/10)

  Comparison

  Highest-rated within coverage, designated as Top Pick

  Risks

  Sales falling short of expectations; slower-than-expected opening of new shopping centers

• C&D International (1908.HK)

  Second-choice pick, also featuring sector beta and self-rescue alpha

  Strengths

  Solid EPS outlook, attractive dividend yield, medium-term revaluation potential; positive net cash position (HK$5.79 per share) offering financial flexibility

  Comparison

  Scorecard slightly lower than China Resources Land (scale 8 vs 9, financing 9 vs 10, leverage 8 vs 10), resulting in a 35% discount versus China Resources Land’s 30%

  Risks

  Gross margin below expectations; slower-than-expected land acquisitions

Key data

• May nationwide commercial housing sales area YoY-13.2%An expansion from April’s 9.5% decline
• May nationwide commercial housing sales value YoY-9.3%An expansion from April’s 7.6% decline
• Year-to-date sales area cumulative YoY-10.8%
• Year-to-date sales value cumulative YoY-13.5%
• 70-city housing price index – new homes MoM-0.2%Steady compared to April
• 70-city housing price index – second-hand homes MoM-0.3%Slight expansion from April’s 0.2% decline
• First-tier cities – new homes MoM+0.2%Accelerated from April’s +0.1%
• First-tier cities – second-hand homes MoM+0.4%Steady compared to April
• May new construction starts YoY-25%Cumulative drop to 23% through the first five months
• May completions YoY-20%Cumulative drop to 23% through the first five months
• Year-to-date real estate investment YoY-16.2%Worsened from the previous four months’ 13.7% decline
• Top-100 developers’ land purchases YoY>-40%Through the first five months
• Sector’s pullback since mid-May~20%Compared to the Hang Seng Index’s 7% decline
• China Resources Land’s 2026e NAVHK$60.88 per shareApplied a 30% discount
• C&D International’s 2026e NAVHK$32.59 per shareApplied a 35% discount

Impact & implications

The report concludes that further deterioration in Q3 sales will exert greater pressure on housing prices and new-home sales, tilting the overall industry risk-reward profile downward. However, structural opportunities exist: first, K-shaped price differentiation allows first-tier cities with strong destocking performance to demonstrate relative resilience; second, developers with high-quality land reserves, sound financials, and robust operational capabilities can navigate cycles and benefit from valuation recovery. China Resources Land and C&D International, owing to their solid EPS prospects, attractive dividend yields, and medium-term revaluation potential, are viewed by the firm as relatively safe choices in a weak market environment.

Risks

• Increasing uncertainty around sales sustainability, with potential for further deterioration in Q3
• Continued fragility in consumer confidence and diminishing policy effects
• Caution among developers leading to reduced available inventory and constraining sales recovery
• Overall industry risk-reward profile skewed downward

What to watch

• Changes in real-time second-hand home sales data in high-tier cities
• Progress in restoring consumer confidence
• Persistence of policy effects and likelihood of additional stimulus measures
• Developers’ land-purchase and construction-start data
• Price trends and degree of differentiation in first-tier cities