UBS turns bullish on China real estate: AI supply chains, industrial profits, and de-stocking in first-tier cities support the rating upgrades

Overview

This report is UBS's upgraded view on the China real estate sector. Its core judgment is that this round of property recovery may be different from the previous several false recoveries. The report argues that AI supply chains and export-related industries are lifting industrial enterprise profits, PPI has turned positive, and the companies with improving earnings and share prices are concentrated in Beijing, Shanghai, Shenzhen, Suzhou, Dongguan, and other cities. Combined with lower vacancy rates in suburban areas of first-tier cities, this is giving first-tier city home prices and transactions a stronger base to stabilize. UBS accordingly raises its 2026-2027 sector forecasts and favors developers and transaction platforms with higher exposure to first-tier-city sales resources, land reserves, and land acquisitions.

Core views

UBS has three core views: first, the recovery in industrial enterprise profits improves visibility for housing demand, especially as AI-related manufacturing, non-metallics, and chemicals make significant profit contributions; second, the headquarters of companies with rising earnings and share prices are concentrated in Beijing and Shanghai, which is corroborated by stronger second-hand home transactions in those cities; third, falling vacancy rates in suburban areas of first-tier cities indicate that the earlier shadow-inventory pressure is being digested. Based on these factors, the report raises its 2026E first-tier city home-price forecast from -10% to flat and its 2027E forecast from -5% to +2%; for second-tier cities, it still expects a 5% decline in 2026E and flat prices in 2027E.

Analysis framework

The report analyzes the market from five angles: the macro profit cycle, mapping city-level demand, inventory and vacancy rates, developers' sellable resources and land-acquisition mix, and the P/BV valuation framework. At the macro level, it combines industrial enterprise profits and PPI with the historical correlation of first-tier city home prices; at the city level, it counts the locations of listed companies with market caps above Rmb10bn and share-price gains of more than 50% over the past 12 months; at the inventory level, it uses the share of bare-shell unit listings in suburban areas as a vacancy proxy; at the company level, it compares 2026 first-tier-city sellable resources, 2025 land-acquisition intensity, and the share of first-tier-city land acquisitions; and at the valuation level, it primarily uses P/BV rather than short-term P/E.

Methodology notes

• Macro and industry cycleCorrelation between industrial enterprise profits and first-tier city home prices

  Improving industrial-company earnings may boost employment, income expectations, and home-buying power, thereby supporting first-tier city home prices.

  The report notes that the historical correlation between industrial enterprise profits and first-tier city home prices is about 0.63, while the correlation between PPI and first-tier city home prices is about 0.53, helping explain why this recovery may be driven by improved corporate earnings.

• City demand mappingMapping of high-growth listed company headquarters

  Use the locations of high-market-cap, high-performing companies as a city-level clue to wealth effects and improving housing demand.

  The report counts companies with market caps above Rmb10bn and share-price gains of more than 50% over the past year, and finds that Beijing, Shanghai, and Shenzhen are highly concentrated in both number and market cap, which aligns with the YoY growth in second-hand home transactions in Beijing and Shanghai.

• Inventory and supplyShare of bare-shell listings as a vacancy proxy

  Because bare-shell units must be vacant, the share of bare-shell listings can serve as a proxy for vacancy rates and shadow-inventory pressure.

  Comparing suburban listing data across five cities in June 2023 and April 2026, the report finds that vacancy rates in first-tier cities and suburban Hangzhou fell by 0.6-10.1 percentage points.

• Valuation methodsP/BV cycle-bottom valuation framework

  When earnings remain at a cyclical low, P/E is less useful, and P/BV is more suitable for measuring a developer's valuation-recovery potential.

  The report argues that if MSCI China Real Estate's P/BV rises from the current ~0.66x back to the 15-year average of 0.85-0.86x, the sector still has about 30% upside.

Asset mapping & comparison

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

• China Real Estate sector

  Sector view upgrade target

  Strengths

  AI supply chains are driving an industrial profit recovery, PPI has turned positive, transactions and vacancy rates in first-tier cities are improving, and new starts and land sales on the supply side are declining.

  Weaknesses

  The recovery is concentrated in first-tier cities, while inventory in second-tier and lower-tier cities remains elevated, and the overall new-home market has not fully recovered.

  Comparison

  Compared with the short-lived policy-driven rebounds of the past, this report emphasizes endogenous demand improvement driven by corporate earnings, wealth effects, and inventory digestion.

  Risks

  If industrial profits weaken, PPI turns negative again, or second-hand home transactions soften, the sector's valuation recovery could stall.

• COLI (0688.HK)

  Key beneficiary developer, upgraded to Buy

  Strengths

  About 50% of 2025 contracted sales came from first-tier cities and Hong Kong, about 50% of the roughly Rmb600bn in sellable resources for 2026 are in first-tier cities and Hong Kong, and its 2025 land acquisitions had a relatively high first-tier-city mix.

  Weaknesses

  It is still affected by the development cycle and the pace of gross-margin recovery.

  Comparison

  It is better positioned than most peers in first-tier-city resources and land acquisitions, and the report adds it to the Key Call list.

  Risks

  First-tier city home prices fail to stabilize, sales growth falls short of expectations, or gross-margin improvement is weaker than expected.

• BEKE / KE Holdings (2423.HK; ADS)

  Beneficiary platform for the recovery in both primary and secondary home transactions, upgraded to Buy

  Strengths

  It covers both primary and secondary transactions; about 40% of secondary GTV comes from first-tier cities, so it has high operating leverage if the recovery is led by second-hand homes and first-tier cities.

  Weaknesses

  Revenue and profit are sensitive to transaction volume, commission rates, and real estate transaction policy.

  Comparison

  Compared with developers, BEKE benefits more directly from the recovery in second-hand transaction volumes.

  Risks

  A weaker-than-expected recovery in second-hand transactions, intensified platform competition, or commission-rate pressure.

• Jinmao

  Developer with high first-tier-city exposure, upgraded to Buy

  Strengths

  It acquired about Rmb16bn of land in 2025, of which 59% was in Beijing and Shanghai; the report raises its 2026E sales and 2026-2028E gross-margin forecasts.

  Weaknesses

  Its earnings base is relatively low, and it is sensitive to gross margins and project sell-through.

  Comparison

  It benefits from improvements in Beijing and Shanghai markets, but its scale and earnings stability are weaker than some leading peers.

  Risks

  Improvements in Beijing and Shanghai transactions and prices fall short of expectations, or project delivery gross margins are below forecast.

• CMSK

  Developer benefiting from the first-tier-city recovery, upgraded to Buy

  Strengths

  Its land-acquisition spending on an equity basis rose 62% in 2025, and about 46% of its roughly Rmb340bn of 2026 sellable resources are in first-tier cities.

  Weaknesses

  It was heavily affected by inventory impairment in 2025, so profit recovery depends on sales and gross-margin delivery.

  Comparison

  It leads the covered companies in land-acquisition aggressiveness and first-tier-city resources.

  Risks

  Inventory impairment continues to weigh on profit, or sales absorption and gross margins fall short of expectations.

• CR Land (1109.HK)

  Buy maintained, target price raised

  Strengths

  Of more than Rmb450bn in sellable resources for 2026, 57% are in first-tier cities and Hong Kong, and it has a value-unlocking logic through its asset-management transformation and asset securitization.

  Weaknesses

  The development business could still weigh on overall profit performance.

  Comparison

  Compared with pure developers, its asset-management transformation provides additional valuation support.

  Risks

  Asset securitization progresses more slowly than expected, or development gross margins are below expectations.

• C&D International

  Buy maintained, target price raised

  Strengths

  It replenished Rmb102bn of land in 2025, equal to 1.12x contracted sales, with 54% in first-tier cities; land replenishment was proactive.

  Weaknesses

  Valuation and earnings still depend on project sell-through and gross-margin recovery.

  Comparison

  It has a relatively high replenishment ratio in first-tier cities, but the report keeps the rating unchanged rather than upgrading it.

  Risks

  Land-investment returns fall short of expectations, or sales recovery is weaker than expected.

Key data

• 1Q26 Industrial enterprise profits+15% YoYAI-related industries, nonmetallics, and chemicals contributed the bulk of the increase.
• Profit contribution from AI-related industries8.2pptContribution of computers, communications, and other electronic equipment manufacturing to 1Q26 industrial enterprise profit growth.
• Correlation between industrial enterprise profits and first-tier city home prices0.63Used to support the historical positive relationship between improved corporate earnings and first-tier city home prices.
• Correlation between PPI and first-tier city home prices0.53PPI turned slightly positive in 2026, reinforcing the view that the profit and price cycle is improving.
• First-tier city 2026E home price forecastFlatPreviously forecast to decline 10%.
• First-tier city 2027E home price forecast+2% YoYPreviously forecast to decline 5%.
• Lower-tier city 2026E/2027E home price forecast-5% / FlatUpgraded from -10% / -5%, but still weaker than first-tier cities.
• 2026E national commodity home salesArea -3% YoY, sales value -7% YoYUBS expects the decline to narrow versus 2025.
• 2026E second-hand home transaction value+7% YoYDriven by 10% growth in transaction area, partly offset by a 3% decline in second-hand home prices.
• National de-stocking completion timeFebruary 2027Earlier than the previous estimate of mid-2027.
• Change in vacancy rates in first-tier cities and suburban HangzhouDown 0.6-10.1pptUsing bare-shell listings share as a vacancy proxy, comparing June 2023 with April 2026.
• Sector valuation upsideAbout 30%Assumes P/BV returns from the current ~0.66x to the 15-year average of 0.85-0.86x.
• COLI target priceHK$25.00Raised from HK$13.80 and upgraded from Neutral to Buy.
• BEKE ADS target priceUS$23.00Raised from US$18.00 and upgraded from Neutral to Buy; BEKE H target price is HK$60.00.
• CMSK target priceRmb12.00Raised from Rmb9.80 and upgraded from Neutral to Buy.

Impact & implications

If the report's view proves correct, the investment theme in China real estate will shift from a broad-based national recovery to first-tier cities and companies with concentrated high-quality resources. For developers, the share of sellable resources in first-tier cities, land-acquisition intensity in 2025, and the proportion of land acquisitions in first-tier cities will determine earnings leverage; for transaction platforms, BEKE will benefit more directly because of its higher exposure to second-hand homes and first-tier cities. On valuation, the market may switch from a short-term earnings trough P/E framework to a P/BV re-rating framework, driving valuation re-ratings for developers trading below historical averages.

Risks

• If industrial enterprise profits and the AI supply-chain cycle weaken, the logic for housing-demand recovery will be undermined.
• If second-hand home transactions in first-tier cities cannot sustain YoY growth, the home-price stability forecast may be revised down.
• Inventory remains high in second-tier and lower-tier cities, which may weigh on national sales, investment, and developers' cash flow.
• The vacancy proxy is based on the share of bare-shell listings and may not fully reflect the true vacancy level.
• There are execution risks in developers' gross-margin recovery, de-stocking, and land-acquisition returns.
• The valuation recovery depends on P/BV reverting to historical averages; if market risk appetite falls, the upside may not materialize.

What to watch

• Whether second-hand home transaction volumes and prices in Beijing and Shanghai continue to improve.
• Whether PPI, industrial enterprise profits, and profit contributions from AI-related manufacturing continue.
• Changes in the share of bare-shell listings and rental/sales inventory in suburban areas of first-tier cities.
• The sell-through rate and gross-margin realization of developers' first-tier-city sellable resources in 2026.
• The pace of land acquisition and the share of newly added land reserves in first-tier cities for COLI, CMSK, Jinmao, CR Land, and C&D.
• Whether BEKE's secondary GTV, primary GTV, revenue, and adjusted net profit meet the upgraded forecasts.
• Whether MSCI China Real Estate and key developers' P/BV ratios continue to recover from below-historical-average levels.