Morgan Stanley upgrades China property to ‘attractive’ despite Evergrande horrors

Morgan Stanley has upgraded China’s property sector to “attractive,” even as worried investors are watching closely to see if debt-saddled Evergrande might default, and whether there will be contagion.

The U.S. investment bank said it believes that policy easing of the property sector looks likely to kick in, which will support Chinese real estate stocks.

China’s property developers have grown rapidly following years of excessive debt, prompting authorities to roll out the “three red lines” policy last year. That policy places a limit on debt in relation to a firm’s cash flows, assets and capital levels.

The world’s most indebted developer, Evergrande, warned twice last month it could default. It has missed interest payments on five offshore bonds so far, that were due in September and October.

Ratings agencies have also downgraded other Chinese property developers on tight liquidity and default risks.

But Morgan Stanley said a “policy inflection point is approaching.”

The analysts said there may be “potential upcoming easing measures,” as policymakers are expected to further ease mortgage quotas, as they have been trying to boost bank loans.

Home purchases have slowed this year, as Chinese cities implemented curbs including home purchase restrictions.

Residential property investment accounts for 6.5% of China’s gross domestic product, while property-related services account for a further 7.3%, according to Morgan Stanley. A 10% slowdown in residential property activity could drag down GDP growth by around 1%, the bank said.


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