Real Estate Down, But E-House Jumps 房地产股票下跌，但易居上涨

By newsdoug on March 9, 2012

China’s volatile real estate market is a never-ending source of news these days, with rumors cropping up just about every week about changes of heart in the government’s steadfast determination to cool the overheated market, even though Beijing consistently denies the rumors. The latest news seems to finally acknowledge the market may be bracing for a long winter, with S&P saying Chinese developers are facing very serious risk of downgrade to their debt. But in a curious twist, E-House (NYSE: EJ), one of the nation’s top real estate services firms, seems to have excited investors with an earnings report that looks very mixed to me, including a massive loss, although the company made a relatively strong forecast for 2012 and also offered a first-ever dividend. Let’s look at the macro news first, which has S&P sounding a very bearish note on China’s real estate sector, saying many developers will be forced to refinance their debt, most likely at higher interest rates, as they are forced to slash prices to boost sluggish sales. (English article) S&P said home prices, which have been falling by low single-digit percentages since the second half of last year, could be down 10 percent year-on-year by June as developers who have been trying to keep prices steady finally give up and cut them to move inventory. The 10 percent figure looks like a good estimate considering current market trends, and I would fully expect to see it accelerate even more in the second half of the year, with year-on-year declines of 20-25 percent likely by year end, dealing a blow to the nation’s many real estate developers. Perhaps investors are expecting a boom in transaction volumes as developers are forced to lower prices, which would play to the advantage of real estate service companies like E-House that depend on transactions rather than home prices for their income. That’s one of the few reasons I can think of for the 10 percent jump in E-House shares after the company reported it swung to a $32 million net loss in the fourth quarter, as revenue slipped 6 percent. (company announcement) Investors may have been encouraged by the E-House’s announcement of a new dividend, following rival Soufun (NYSE: SFUN), which also announced a dividend last year. But at 15 cents per ADS, the payout isn’t very big, equal to about 2 percent of its last closing price. Instead, I suspect investors are excited about E-House’s forecast that 2012 revenue will rise about 25 percent this year despite the weak market, indicating that it indeed does see sales volumes picking up sharply as debt-heavy developers and home owners start selling their homes when they realize the market won’t improve anytime soon.

Bottom line: Real estate developers will come under growing pressure this year as they refinance debt at higher interest rates, while services firms will benefit from rising transaction volumes.

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