Daiwa Says China Property Rally Lacks Confidence With 1 Key Risk

A recent 20% rally in Chinese property stocks is not a structural recovery, as both developers and homebuyers lack the confidence needed for a sustainable turnaround, according to a new Daiwa Capital Markets report. The analysis suggests that while April sales data showed surprising strength, the recovery is narrowly based and masks underlying weakness, leading the firm to prefer state-owned developers over their private peers.

The report, published May 13, argues that improved market sentiment has yet to translate into a foundational shift. Daiwa noted that genuine confidence from both developers and buyers is a prerequisite for a structural and sustainable recovery, a condition it says has not yet been met. The firm maintained a “Buy” rating on state-owned enterprises China Resources Land (01109.HK) and China Overseas Land & Investment (00688.HK).

Data from April showed primary and secondary residential sales rising 2.4 percent and 5.0 percent year-over-year, respectively. The rebound was most pronounced in Tier-1 cities, where primary and secondary sales surged 20 percent and 14 percent. However, Daiwa pointed out this was driven by lower-priced, older apartments, while sales of commodity housing priced above RMB 5 million fell 25 percent year-over-year.

Daiwa believes that if the sales momentum in Tier-1 cities continues, sector share prices may rise further in the short term, but correction risks are real. The preference for state-owned developers stems from a view that private developers face significant downgrade risks once the current market momentum fades, highlighting the precarious nature of the rebound.

A Tale of Two Tiers

The divergence within China’s property market is a critical theme. While headline sales in top cities appear robust, the weakness in the high-end segment points to cautious household spending. Developers have been quick to increase supply, with new home pre-sale permits in Shanghai surging 70.8 percent year-over-year in April, yet few have withdrawn discounts. This indicates they are capitalizing on the brief sentiment improvement to offload inventory rather than betting on a long-term price recovery.

This flight-to-quality and market bifurcation is also visible in the commercial sector. A 2026 report from Cushman & Wakefield noted that while office fit-out costs have declined in mainland cities like Shenzhen and Seoul, competition for prime, high-quality office space is intensifying. This suggests that both residential homebuyers and corporate occupiers are gravitating towards the most secure, highest-quality assets, leaving the rest of the market to struggle.

Broader Headwinds Persist

The property sector’s condition is a key variable for the broader Chinese economy. The government’s full-year growth target of 4.5 percent to 5 percent was made more attainable by a strong first quarter, but the property slump remains a significant drag. According to national data, property investment declined by 11.2 percent in Q1 2026, weighing on overall fixed-asset investment.

Until there is a more convincing and broad-based recovery in the property market, which requires a significant return of buyer and developer confidence, the sector will continue to pose a risk to China's economic ambitions. Daiwa’s report serves as a caution that the recent green shoots in property sales may be a temporary bloom rather than a lasting spring.

This article is for informational purposes only and does not constitute investment advice.