Why China's real estate activity will support shipping stocks (Part 1 of 3)
The significance of real estate for dry bulk shippers
China’s real estate sector is a key driver of shipping 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 that haul iron ore and coal across the ocean. So several dry bulk shippers mention “urbanization” in their presentation as a key driver of business growth. This means high real estate activity is often positive for dry bulk shipping demand, and vice versa.
The real estate sector remains strong
For July, sales of buildings in China grew at a year-over-year rate of 14.47%, compared to 17.87% in June and a record 77.35% in February. Using the last six points (usually six months) of data, annual growth remains at a solid 40.96%, which is up from 39.99% in June. Sales in China can be volatile from month to month, so analysts smooth the data. The year-over-year growth also takes into account seasonality, and analysts often look at this rate because the market tends to move when the outlook gets better or worse, rather than whether it’s good or bad.
The importance of building sales
Historically, the sales growth of buildings has often mirrored economic growth in China and elsewhere in the world. This is because houses are the biggest purchases most individuals can make. Plus, central banks will often reduce interest rates in times of recession or economic slowdown, which is an incentive for people to purchase houses at the time. Better economic outlook and employment outlook are also some of the factors that drive people to purchase a house.
Building prices falling
Growth building prices (measured in price per square foot of floor space sold) continued to fall in June, reaching just 9.66% using the last six data points. This is a significant improvement from the high of 11.96% we saw in March, as the government tried to cool the property market down to prevent a bubble through restriction of credit to individual buyers and the imposition of a capital gains tax on sellers.
As we move into August’s data, analysts will exclude this year’s February data. Because February’s growth rate was one of the highest, the exclusion of the high data point will give us a lower growth rate over the next few months. While possibly negative for dry bulk shipping companies, investors should also look at what’s going on with the supply end of the property market.
Browse this series on Market Realist