Investors Gambling on China's State backed Real Estate Firms

Investors betting on a recovery in China's battered real estate sector prefer state-backed firms that are more likely to benefit from government support, according to market participants.

Three years of measures aimed at curbing speculative price rises and reducing developer debt have gutted the hugely leveraged sector, with a string of major names defaulting on bonds or otherwise in dire financial straits.

However, the Politburo signalled a shift in real estate policy last month, and the People's Bank of China promised reasonable financing for developers and lower mortgage rates. Some cities, such as Zhengzhou, have begun to relax property market restrictions.

State-owned developers may offer government endorsement and better access to cheap financing to hesitant investors eager to return to a sector that accounts for a quarter of the economy.

Markets reflect such sentiments. The price index of mainland developers in Hong Kong, which is primarily composed of private firms, has fallen nearly 30% this year. China's more mixed domestic real estate benchmark has fallen 13%.

State-owned developers such as Yuexiu Property and China Resources Land have a price-to-earnings ratio of eight, while some private developers such as Country Garden Holdings have a ratio of less than two.

Some private developer bonds, such as those issued by Country Garden and CIFI Holdings, are rated below investment grade.