<

Soaring housing prices are actually positive for China’s real estate and dry bulk stocks

China Real Estate Sales and Floor Price 2013-06-25Enlarge GraphContinued from Low inflation supports availability of monetary stimulus, positive for shipping stocks

Real estate and dry bulk demand

China’s real estate sector is a key driver of dry bulk demand. While it makes up ~13% of China’s GDP, its significance is larger, as it interconnects with steel manufacturing, iron ore and coal mining, and the dry bulk shipping companies which haul iron ore and coal across ocean. As such, high real estate activity (purchases, construction and development) is often positive for dry bulk shipping demand, and vice versa.

China’s real estate sector

Building sales in China have remained robust, growing 52.75% year-over-year in May 2013. Housing prices (measured in price per square foot of floor space sold) also grew, at a high rate of 12.65%. Growth in prices has fallen from the peak of ~19% this year, as the government tried to cool the property market down to prevent a bubble through the restriction of credit to individual buyers and the imposition of a capital gain tax on sellers.

Analysts have expressed that high real estate prices will restrict looser monetary and fiscal policies to support economic growth. But is this really something to worry about? A look at land areas purchased indicates that developers are showing interest in purchasing more land. In May, year-over-year growth in land area purchased stood at -13.10%. While lower than the -8.60% seen in April, the May number is higher than what we saw at the second half of 2012.1

China Real Estate Activity 2013-06-26Enlarge Graph

Construction activity and shipping demand

Furthermore, land purchases have led construction activity in the past. This makes sense because high sales price encourages developers to purchase more land and construct buildings for sale. Although growth in floor space under construction tapered off slightly since March 2013, it has remained above the levels seen during the second half of 2012. This means that if we continue to see positive development in land purchases, construction activity should also rise. If history is a guide, land purchases and construction activity should continue to grow positively. From the end of 2008 to the end of 2009, building sales and prices also rose to a record level (see the two charts above). Sales and price growth fell after, as the government curbed speculative activities, while construction and land purchase growth continued higher.

Thus, even though rising housing prices are a concern for the government and recent financial woe dragged stock prices down (see Must-know: Shipping companies hit by China’s financial woes), the government has the option to take a looser monetary and fiscal policy stance to stabilize the financial sector and support the economy—if it wants to. The current low inflation rate also supports this view (see Low inflation supports availability of monetary stimulus, positive for shipping stocks). This action would be positive for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Eagle Bulk Shipping Inc. (EGLE) and Navios Maritime Partnerships Inc. (NMM).

But in the short term, more monetary stimulus is doubtful, as the government’s policy stance objective has changed. Read on at Overall housing prices are becoming cheaper for Chinese, positive for tankers.

  1. Analysts use year-over-year growth because the market often moves when the outlook gets better or worse rather than whether it’s good or bad.