Why China's real estate activity will support shipping stocks

Part 2
Why China's real estate activity will support shipping stocks (Part 2 of 3)

Real estate supply side activity positive for dry bulk shippers

The importance of supply side activity

Although housing sales can influence real estate developers’ decisions—such as how much steel to purchase, how many buildings to construct, and when to construct—it’s also important for investors to evaluate what’s happening with the supply side of real estate. Real estate activity cooled in 2010 (see Part 1), when soaring real estate prices hurt purchases and constrained supply.

China Real Estate Supply Data 2013-08-15Enlarge Graph

Construction activity and shipping demand

For July, construction activity (measured in the area of floor space under construction) grew at a year-over-year rate of 25.60%. This is higher than the 20.35% we saw in June. Land purchases  also grew at a higher pace of 14.53% in the same month, which is up from -2.75% in June. The two indicators have been in an uptrend since mid-2012, when interest rates cuts and government stimulus were announced to energize deteriorating economic fundamentals. The need for a smooth transition in power also meant the government needed stable economic growth to reduce the possibility of social unrest.

China Real Estate Investment Growth 2013-08-15Enlarge Graph

Investment activity remains positive

From January to July, investments in real estate development grew at a steady rate of 21% compared to the same period a year before. Like construction and land purchase activity, investments into developing buildings have risen since mid-2012. The indicator shows that developers continue to put money into new projects on the expectation that they can sell them for good profits.

Outlook on supply side activity

Current data suggests that over the next few months, growth in building sales and low commodity price inflation should support construction and land purchase activity. This bodes positive for dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Eagle Bulk Shipping Inc. (EGLE), and Navios Maritime Partnerships Inc. (NMM) because high construction and land purchase activity mean more commodity imports.

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