We recently visited the property market in Hohhot, a Tier-3 city in Inner Mongolia. Overall, the scenario in Hohhot is very different from Erdos, another city in Inner Mongolia, which some bearish market participants tend to refer to as a "ghost town" in China. The property market in Hohhot is driven more by end-user demand from city dwellers and those living in other parts of Inner Mongolia. There have not been significant rises in ASPs in the past, so there is now also less downward pressure on property prices.

Adequate land supply in the city has had limited ASP growth in the past

Compared with the Tier-1 and bigger Tier-2 cities, where new land supply in the city-center areas is more limited, there is still adequate new land supply in Hohhot's city center, especially as city center areas continue to expand on the back of the city's economic growth. With this adequate new land supply, there has been less drastic property price appreciation in Hohhot than in Tier-1/2 cities, and, consequently, we now expect there to be much less pressure for ASPs in the city to decline compared with Tier-1/2 cities.

Around 40% of homebuyers pay completely in cash when buying properties

According to property consultants and the sales managements of developers, about 40% of homebuyers pay completely in cash when buying homes in Hohhot. For low- to mid-end projects, the buyers are mainly domestic citizens in Hohhot, while, for higher-end projects, about 50% of the buyers tend to be from other parts of Inner Mongolia, and these people like to have homes in Hohhot because it has more pleasant city living conditions, especially as it can be very cold in Inner Mongolia during winter.

Eoin Treacy's view Considering the widespread fear of a Chinese property crash, this report offers a contrarian perspective by highlighting the granularity evident in the market. There is little doubt that Tier 1 cities are most at risk of price declines since they experienced by far the largest advances. The central government actively targeted the property market in its tightening measures and has succeeded in reversing runaway price appreciation. This policy was particularly negative for property developers and banks. They fell earlier and farther than other many sectors. They could be among some of the greatest beneficiaries of a change to China's tightening bias.

The Hang Seng Property & Construction Index has recently performed more or less in line with the wider market. It found support above the October low in November and has rallied to test the lower side of the overhead trading range and the 200-day MA. A sustained move above 2500 would suggest a return to medium-term demand dominance. The Hong Kong Property Index has a similar chart.

The Shanghai Property Index rallied impressively before the New Year holiday. However it will need to sustain a move above 3200 to break the progression of lower rally highs and suggest a return to medium-term demand dominance.

A number of the shares reviewed in the above report were among the better performers in the sector prior to September. China Overseas Grand Oceans Group had become quite overextended relative to the 200-day MA by August. It encountered resistance near HK$10 and abruptly fell to HK$4. It has since held a progression of higher reaction lows and a sustained move below HK$5.66 would be required to question medium-term recovery potential. Longfor Properties and China State Construction International (yields 2%) have been less volatile but also fell abruptly and found support in October. They are both currently testing their respective 200-day MAs.

China Resources Land yields 2.23% and has been trending lower since late 2009. The pace of the decline picked up in September and is has since rallied to challenge the two-year progression of lower rally highs. A sustained move above HK$16 would be required to indicate a return to medium-term demand dominance.

Following a retest of the 2007 peak, China Overseas Land & Investment (yields 1.98%) ranged with a downward bias from early 2009 It also found medium-term support in October ad has recouped more than half its decline. A sustained move below HK$12 would be required to question medium-term scope for additional higher to lateral ranging.