China real estate's secondary-home rebound still needs confirmation; Morgan Stanley recommends caution and selective picks

Overview

This report discusses whether China's real estate market has truly reached a turning point recently. Morgan Stanley notes that the unexpected rebound in secondary-home sales since March has revived debate over whether the housing cycle has bottomed, but it believes the evidence is still insufficient. The report emphasizes that the rebound is concentrated in some higher-tier cities and in the secondary-home market, while the new-home market remains weak and household income expectations, rents, inventories, and homebuying confidence have not improved enough. Accordingly, the report keeps a cautious view, arguing that the more likely outcome is an L-shaped, city-divergent recovery rather than a broad V-shaped rebound.

Core views

The core view is that a rebound in secondary-home sales does not mean the property cycle has definitively reversed. Near-term sales improvement comes from post-Lunar New Year pent-up demand, policy easing in cities such as Beijing and Shanghai, the appeal of lower-ticket secondary homes on a rent-to-price basis, and the amplifying effect of a low base. But sustainability remains constrained by weak household income and employment expectations, rents that are still trending lower, high inventory pressure in both new and secondary homes, and continued pessimism among households about house prices. The report expects secondary-home sales in 2026 can still post 5-7% YoY growth, while new-home sales continue to decline YoY, leaving total annual transaction volume roughly flat; 2027 may see a low-single-digit decline.

Analysis framework

The report combines a top-down industry-cycle judgment with a bottom-up assessment of developer valuations and stock picks. At the macro level it compares household income, employment, leverage, rents, inventories, homebuying willingness, and policy signals; at the market level it breaks out new homes versus secondary homes, different city tiers, and lower-ticket housing transactions; at the equity level it evaluates developer risk/reward through 2026E NAV discounts, P/E, EV/pre-sales, core earnings, and dividend yield.

Methodology notes

• Industry cycle judgmentSales-price-sentiment feedback framework

  Use transaction volume, listing volume, house prices, rents, and household expectations to judge whether real estate has entered a positive loop.

  If viewings, transactions, listings, and prices keep improving, that may support house-price stabilization; if listings rise again, owners become more willing to cut prices, or sales slow once more, a negative feedback loop may form.

• Scenario analysisBull/base/bear sales forecast

  Estimate the sales path under further policy easing, status quo continuation, and rising liquidation pressure.

  The base case expects total 2026 transaction volume to be roughly flat; the bull case assumes stronger policy support and total transaction volume growth of 5-10% YoY; the bear case assumes a rebound in secondary-home listings and renewed house-price pressure, leading to a 8-10% YoY decline in total transaction volume.

• Valuation analysisNAV discount and earnings multiples

  Use 2026E NAV discount, 2028E P/E, and EV/pre-sales to judge whether developer share prices already reflect a recovery.

  The report believes current valuations are already above 2016-2020 bull-market levels, implying the market is too optimistic about normalized profits, while developers' medium-term sales, margins, and ROE are unlikely to return to pre-downcycle levels.

Asset mapping & comparison

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

• China Resources Land Ltd. (1109.HK)

  Top pick, Overweight, target price HK$42.60

  Strengths

  Its EPS outlook is relatively stable, dividend yield is attractive, and it has medium-term rerating potential; it benefits from both industry beta and its own fundamentals.

  Weaknesses

  It is still affected by industry sales and house-price trends, and further valuation upside depends on a recovery in market confidence in the property cycle.

  Comparison

  The report names it Top Pick, placing more emphasis than most developers on fundamental benefit and self-help alpha.

  Risks

  Sales recovery falls short of expectations, house prices keep declining, margins come under pressure, and policy support is insufficient.

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

  Second-preference name, Overweight, target price HK$21.18

  Strengths

  It has relatively good earnings prospects, dividend returns, and potential for medium-term rerating.

  Weaknesses

  It remains sensitive to the real-estate sales cycle and financing conditions.

  Comparison

  As a preferred name after CR Land, the report sees it as having both industry beta and company-level improvement potential.

  Risks

  Slower sales, wider NAV discount, and a pullback in industry risk appetite.

• China Overseas Land & Investment Ltd. (0688.HK)

  Equal-weight, target price HK$15.00

  Strengths

  A large state-owned developer with relatively strong asset quality and financing capacity.

  Weaknesses

  The report does not rank it as the best pick; its risk/reward is relatively balanced.

  Comparison

  Compared with CR Land and C&D, the report is more cautious on its upside elasticity.

  Risks

  A pullback in industry valuations, and sales and gross margin recovery that falls short of expectations.

• China Jinmao Holdings Group Ltd (0817.HK)

  Equal-weight, target price HK$1.79

  Strengths

  It has some state-owned background and project resources.

  Weaknesses

  Profitability and sales recovery are highly uncertain, and the report does not rank it as a top pick.

  Comparison

  Compared with CR Land and C&D in the recommendation sequence, its investment appeal is weaker.

  Risks

  House prices continue to decline, inventory de-stocking is slow, and margins and ROE remain under pressure.

• China real estate industry

  Industry view In-Line; wait for clearer evidence of a turning point

  Strengths

  Secondary-home sales have rebounded clearly in some higher-tier cities, and lower-ticket homes are attracting some owner-occupiers as rent-to-price ratios improve.

  Weaknesses

  Household income and confidence remain limited, rents are still falling, inventories are elevated, and new-home sales are weak.

  Comparison

  The report sees the current phase more as an uneven, L-shaped recovery rather than a broad upcycle like 2014-2015.

  Risks

  The sales rebound is not sustainable, owners accelerate listings, house prices keep falling, and valuations become overly optimistic.

Key data

• Secondary-home sales rebound25 cities: March YoY +17%, April YoY +30%, 4M26 cumulative YoY +14%Based on the real-time transaction data tracked for 25 key cities in the report.
• Post-Lunar New Year growthCumulative secondary-home sales YoY after the Lunar New Year were about +18%The report believes the Lunar New Year timing gap magnified the headline growth rate; after adjustment, the rebound still exists but is milder.
• New-home sales performance25 cities: March YoY -16%, April YoY +4%New homes are clearly lagging secondary homes, showing that the recovery is uneven.
• 2026 base-case sales forecastSecondary-home sales +5-7% YoY, total transaction volume roughly flatThe total transaction forecast was raised by 3-4 percentage points versus before.
• 2026 bull-case scenarioTotal transaction volume +5-10% YoYAssumes fiscally supported urban-village redevelopment/old-town renovation, further relaxation of purchase restrictions, or further declines in mortgage rates.
• 2026 bear-case scenarioTotal transaction volume -8-10% YoYAssumes owners and speculators accelerate listings for sale on the back of the rebound, re-intensifying house-price pressure.
• New-home inventory in major cities70 cities: March 2026 new-home inventory at 32 months23 months in first-tier cities, 30 months in second-tier cities, and 42 months in third-tier cities, all above historical averages.
• Rents and rent-to-price ratiosRents in 76 cities have cumulatively declined 15% since July 2021, and the average rental yield has risen to 2.70%A larger decline in house prices improved rental yields, but falling rents still weigh on house-price expectations.
• Household price expectationsAlphaWise survey shows a net 44% of respondents expect house prices to fall over the next 12 monthsUp from 42% in October 2025, indicating price expectations remain weak.

Impact & implications

The investment implication is that the margin of safety has declined after the industry beta rebound, and the risk/reward of simply betting on a broad real-estate recovery is unattractive. If viewing volumes, listings, rents, and prices fail to improve consecutively over the next few months, developer valuations may face a pullback. Relatively speaking, central and state-owned enterprises or high-quality developers with steadier earnings, better dividends, stronger asset quality, and room for self-help are more worth watching.

Risks

• If fiscally supported housing stimulus, further easing of purchase restrictions, or a meaningful cut in mortgage rates is introduced, sales and prices could improve faster than the report's base case.
• If owners and speculators accelerate selling on the back of the rebound, secondary-home listings could rise again and put renewed downward pressure on house prices.
• If employment and income expectations continue to weaken, homebuying plans could be delayed further.
• Continued declines in rents would weaken the support that improved rent-to-price ratios provide for house prices.
• Developer valuations already reflect a lot of optimism, and if sales growth slows, share prices could pull back.

What to watch

• Secondary-home viewing volumes and the sustainability of transactions from May to August 2026.
• Whether secondary-home listings continue to fall or reverse higher as owners rush to sell.
• Whether secondary-home prices in higher-tier cities such as Beijing, Shanghai, Shenzhen, and Guangzhou can turn positive sequentially for several months in a row.
• Whether the share of lower-ticket housing transactions keeps rising and starts to spread to mid- and higher-ticket homes.
• Whether rents stabilize and whether the improvement in rental yields can continue to support demand for home purchases.
• Whether local or central authorities introduce new policies such as fiscal support for old-town renovation, further relaxation of purchase restrictions, or mortgage-rate cuts.
• Whether developers' new-home inventory for sale, land replenishment, and gross margins show material improvement.