Wall Street Upgrades Rating: Is the Recovery of China's Real Estate Sector Really Coming?

The Chinese real estate market has shown the most concentrated signs of stabilization in recent years.

In March, nearly one-fifth of cities covered by official data saw an increase in the price of second-hand houses on a month-on-month basis, the highest proportion since 2023; for the first time in five years, the inventory of completed but unsold housing has declined.

Institutions such as Citigroup and Bank of America have successively upgraded their ratings for this sector, andSLJ Capital of Euroz栗子s believes that 2026 will be the year when the market hits bottom.

Citigroup analysts upgraded their rating for the real estate sector from "neutral" to "positive," stating that the market is "prepared for recovery." They pointed out that strong data and improving market sentiment are factors driving the market recovery, and they believe that "a slow recovery in key cities with policy support is the best scenario for real estate companies."

The Global Research Department of Bank of America favors developers with concentrated investments in top-tier cities and less historical inventory.

However, this recovery narrative carries a heavy historical burden.

Since the downturn in the real estate market at the end of 2021, similar optimistic predictions have repeatedly emerged and failed - Goldman Sachs claimed in 2024 that "the turning point has come," which did not come true; UBS abandoned its "soon-to-recover" forecast just last November.

To what extent this round of "bottoming theory" can hold out, the market holds a certain degree of reservations.

Morgan Stanley analyst Stephen Cheung explicitly stated in a report on April 26 that recent data improvements may be beautified by a combination of base effects, one-time policy stimulation, and pent-up demand. "We are skeptical about its sustainability, and the spread of recovery to lower-tier cities is still far away."

JPMorgan believes the real test will be in July to August, thinking that if the data is still robust at that time, they will further upgrade their judgment on this sector.

The current improvements are mainly concentrated in the second-hand housing markets of first-tier cities such as Beijing and Shanghai, with new construction and sales still shrinking, and smaller cities continuing to struggle.

Bloomberg economists estimate that the required real estate investment to contract supply to match actual housing demand is currently about 70%, and the remaining 30% gap may take one to two years to fill.

From a longer-term perspective, structural pressures such as a weak job market, low income expectations, and population shrinkage will continue to suppress the ceiling of housing demand.

For investors, the uniqueness of the current situation is that expectations have been low enough, most of the downside has been priced in, and even a slight sign of stability is enough to change the market narrative.

Homin Lee, a strategist at Lombard Odier, is quite representative - if this is another false dawn, given that the sector has shrunk significantly and risks have already been priced in, the negative impact is limited; if it is a real sprout, it may drive a shift in the overall narrative of China's domestic economy.

The subsequent focus of observation is whether sales and price data from the end of the second quarter to the third quarter can be sustained, and whether there will be more forceful support measures introduced on the policy front - history has repeatedly proved that without stronger policy support, the stability of local cities is difficult to self-strengthen into a comprehensive recovery.