May saw improvement in real estate sales, but polarization intensified; SOEs lead while private enterprises face pressure

Overview

This report is Morgan Stanley's monthly tracking report on the Chinese real estate sector, analyzing the sales performance of developers in May 2026. The report points out that despite some leading developers showing a narrowing year-on-year decline in sales, internal polarization has intensified. SOE developers achieved positive growth due to their brand advantages and available resources in first-tier cities, whereas most private enterprises continue to face deep adjustments. The report maintains its prediction of total transaction volumes being flat YoY for the whole year, but warns that sales may weaken in Q3 as policy effects fade. It recommends investors select stocks that benefit from both industry Beta and individual Alpha.

Core views

Sales data shows 'improvement but polarization': For the top 50 and top 100 developers, the year-on-year decline in equity sales in May narrowed to 2% (April was -6% and -10%, respectively). Year-to-date cumulative declines were 15% and 17%, respectively, indicating that policy easing has started to take effect in some cities. Surprisingly, the decline in sales for the 25 key developers tracked by Morgan Stanley widened to 17% (from 9% in April), with year-to-date cumulative drops reaching 28%, suggesting that market concentration or enterprise polarization is intensifying. State-owned and private enterprises perform differently: State-owned developers continue to record positive growth, with standout performances from China Resources Land (+38%), China Merchants Shekou (+20%), Yuexiu Property (+18%), China Overseas Land (+14%), and Jianfa International (+13%). The report attributes this mainly to stronger brand recognition and more newly available resources in first-tier cities among SOEs. In contrast, private enterprises such as Sunac, CIFI, Longfor, Xin Cheng Development, and Country Garden Holdings all experienced declines exceeding 45%, and some mixed-ownership enterprises like Gemdale (-36%) and Vanke (-44%) also showed weak performances. Prudent forward-looking judgment: Considering limited willingness among residents to leverage and cautious income expectations, it is expected that second-hand home transaction volumes may slow further in June and possibly turn negative YoY in Q3. New home sales are expected to continue declining due to reduced available resources from developers (a possible 5-10% decline due to base effects). The report maintains its forecast of total transaction volumes being flat YoY for the entire year of 2026, with new homes down 8-10% and second-hand homes up 5-7%. It expects overall house prices to show a mild downward trend in 2026-27, but some first-tier cities may see slight increases.

Analysis framework

The report adopts a combination of 'top-down' macro analysis and 'bottom-up' stock selection. First, it tracks the changes in monthly equity sales of the top 20/30/50/100 developers through CRIC high-frequency data to identify turning points in industry sentiment. Second, it breaks down sales performance by enterprise nature (SOE/mixed ownership/private enterprise) to analyze structural differences in benefiting from policy easing. Finally, it combines leading indicators such as resident leverage willingness, income expectations, and second-hand home listings to predict Q3 sales trends. In stock selection, the NAV (Net Asset Value) valuation method is used. For development properties, a DCF model (WACC 8.0-8.2%) is applied, and for investment properties, a capitalization rate method (5-8%) is used. Then, based on dimensions such as land reserves, execution ability, scale, growth potential, profitability, financing capability, and leverage levels (with a maximum score of 10), a discount of 30-45% is given. Currently recommended are China Resources Land and Jianfa International due to their stable EPS outlook, attractive dividend yields, and medium-term revaluation potential.

Methodology notes

• Valuation MethodNAV Net Asset Value Method

  NAV (Net Asset Value) Valuation Method

  This is a commonly used valuation method for real estate developers, breaking down company value into development properties (using DCF discounting), investment properties (using capitalization rate method), and net debt/cash. A certain discount (typically 30-45%) is then applied to NAV to reflect liquidity risks and execution risks. In this report, a 30% discount is applied to China Resources Land and a 35% discount to Jianfa International, with the discount level depending on scores across seven dimensions including land reserves, execution ability, and financial leverage.

• Company Fundamentals and Financial FrameworkFree cash flow analysis

  Application of DCF (Discounted Cash Flow) in Valuing Development Properties

  The report uses a DCF model to value development properties, applying a WACC (weighted average cost of capital) of 8.0-8.2% to discount future cash flows. This reflects institutional considerations of the time value and risk premium of future cash flows from real estate projects.

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Real Estate Supply and Demand and Price Transmission Mechanism

  The report analyzes the match between 'newly available resources' (supply side) and 'resident leverage willingness and income expectations' (demand side), pointing out that second-hand home sales are leading indicators of new home sales. Their slowdown will be transmitted to the new home market, affecting housing price trends.

• Event Gaming and Behavioral FinanceExpectation Gap / Expectation Management

  Policy Effect Fade and 'Expectation Gap'

  The report highlights the risk of expectation gaps after the fading of policy effects and the exhaustion of pent-up demand, viewing data from June to August as critical observation windows to confirm whether a market turning point has occurred.

Asset mapping & comparison

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

• China Resources Land (1109.HK)

  Top Pick recommendation, benefiting from SOE advantages, first-tier city layout, stable profitability, and dividends

  Strengths

  Sales up +38% leading the industry, stable EPS outlook, attractive dividend yield, mid-term revaluation potential, high scores for land reserves and execution (8/10), healthy financial leverage (10/10)

  Weaknesses

  High proportion of investment properties, need to monitor mall opening progress

  Comparison

  Compared to private and mixed-ownership enterprises, China Resources Land significantly leads in sales growth, financing capability, and financial stability

  Risks

  Sales below expectations, slower-than-expected openings of new malls

• Jianfa International (1908.HK)

  Secondary recommendation, benefiting from SOE status and regional layout

  Strengths

  Sales up +13%, net cash position (HK$5.79/share), offers certain safety margin, land reserve score 8/10

  Weaknesses

  Lower scores for scale (8/10) and profitability (7/10) compared to China Resources Land, need to monitor gross margin pressure

  Comparison

  Higher valuation discount (35%) than China Resources Land (30%), reflecting market concerns about profit quality, but net cash position provides defensive qualities

  Risks

  Gross margin lower than expected, slower-than-expected land acquisition

• Sunac, CIFI, Longfor, Xin Cheng, Country Garden Holdings, etc., private enterprises

  Avoid/Under Pressure, significant sales decline

  Weaknesses

  May sales down by more than 45% YoY, facing severe liquidity and debt pressures

  Comparison

  Brand credibility and replenishment capability of sellable resources lag behind SOEs

  Risks

  Continuous sales deterioration, financing difficulties, debt default risks

Key data

• Top 100 Developers' Equity Sales YoY in May-2%Improved compared to April (-10%)
• Top 50 Developers' Equity Sales YoY in May-2%Improved compared to April (-6%)
• 25 Key Developers' Sales YoY in May-17%Worsened compared to April (-9%)
• China Resources Land's Sales YoY in May+38%Best performer among SOEs
• Vanke's Sales YoY in May-44%Pressure on mixed-ownership enterprises
• China Resources Land's 2026e NAVHK$60.88/shareBased on a 30% discount
• Jianfa International's 2026e NAVHK$32.59/shareBased on a 35% discount
• 2026 New Home Sales ForecastDown 8-10% YoYFull-year forecast
• 2026 Second-hand Home Sales ForecastUp 5-7% YoYFull-year forecast

Impact & implications

The report believes that although there was marginal improvement in May's sales data, the industry's risk-reward still leans to the downside, primarily due to questions about the sustainability of sales. For investors, the key lies in identifying stocks that possess both 'industry Beta' (benefiting from overall market stabilization) and 'individual Alpha' (standing out due to land layout and financing advantages). State-owned developers are considered to meet this standard due to their resource layout in first-tier cities and financing advantages. The report specifically notes that sales volume, house prices, second-hand home listings, transaction structure, and rental rates over the next three months (June-August) will be important indicators to judge whether the market has reached a turning point. If second-hand home sales significantly slow down after June, it could drag down new home sales, reinforcing downward price expectations and creating negative feedback.

Risks

• Sales sustainability falls short of expectations: After the policy effect fades, sales in Q3 may weaken
• House price downside risk: Overall house prices may continue to fall mildly, impacting developers' gross margins and asset values
• Second-hand market transmission risk: Slower second-hand home sales may further drag down new home demand
• Insufficient resident leverage willingness: Cautious income expectations lead to weaker-than-expected housing demand release

What to watch

• Changes in sales volume from June to August
• House price trends, especially second-hand home prices
• Changes in second-hand home listings
• Transaction structure (first-time buyers vs. upgrade buyers)
• Rental rate changes