Analysts at CITIC SEC suggest the long-term bottom for China's property market could materialize in the second half of 2026.
A combination of factors is laying the groundwork for a recovery in housing prices this year. These include a decline in second-hand home listings in major cities, a multi-tiered recovery across the property chain, rental yields that now significantly exceed deposit rates alongside steady rental performance, and the supply of new homes that offer superior quality compared to existing stock.
Signs of a Market Bottom Emerging
The ongoing adjustment in home prices has led to a significant improvement in rental yields across Chinese cities, which now notably surpass bank deposit rates and are approaching commercial loan interest rates, while overall rents remain stable. Since March 2026, over ten cities have reported consecutive month-on-month increases in home prices. Transaction volumes for existing homes have been expanding, with cumulative sales through major agencies in 76 cities from January to May growing 20% year-on-year.
This recovery phase, distinct from 2025, is showing greater durability. Listings of second-hand homes in core cities have dropped noticeably, with volumes in Beijing and Shanghai down approximately 20% from their 2025 peaks. The recovery is also broadening from initial strong sales of smaller units to encompass demand for larger, improved properties. The analysis indicates that the trend of price stabilization, beginning in Shanghai, is expected to gradually extend to a wider geographical area.
New Homes Expected to Outperform Existing Stock
Supply of new housing has tightened considerably, with new construction starts in the first four months of 2026 at less than 30% of historical peaks. Policy support for constructing high-quality homes and recognizing the premium for superior products is widening the quality gap between new and existing housing. New homes that are safe, comfortable, green, and smart are increasingly favored by consumers. Even with a growing supply of existing homes, they do not fully substitute for new properties. Developers are anticipated to pursue a path of high-quality development by focusing intensely on product quality.
Key Industry Challenges Easing
Several critical issues that have plagued the residential development sector are showing signs of resolution. Beyond falling prices, historical problems such as financing being tied to company scale, management risks from overly independent regional operations, conflicts in joint development ventures, and an excessive focus on turnover speed under price caps have all contributed to lower project quality, particularly from land acquired in 2021.
Since 2026, there has been a fundamental improvement in operational quality among developers. Financing is no longer linked to scale, headquarters have strengthened control over regional operations, joint development projects have decreased markedly, and a focus on quality is now yielding necessary price premiums.
Improving Asset Quality and Balance Sheet Strength
The proportion of high-quality income-generating assets on property companies' balance sheets has been rising over the past five years, as has the share of sustainable operational cash flow in total company receipts. While partly a result of passive inventory reduction, this trend also coincides with many firms actively enhancing their operational capabilities by establishing professional teams for managing malls, cultural/sports venues, and hotels.
In the long run, the analysts believe mainland Chinese developers may follow a path similar to Hong Kong-listed property leaders who have weathered multiple cycles, moving towards a development model characterized by lower leverage and a greater proportion of held investment assets.
Notable Risks Remain
While a broad-based halt to price declines is anticipated, localized and short-term market fluctuations are still expected. Starting June 2026, seasonal factors may pose a risk of price declines for second-hand homes in some cities. Certain segments of investment property face risks from oversupply and potential further rental decreases. Although overall risks in residential development have diminished, some companies may face challenges with slow sales velocity during the shift towards competing on product quality.
Investment Implications and Strategy
The analysts conclude that home prices remain the most critical factor determining the outlook for property firms. Their current core view is that price declines will cease in 2026, marking the end of the sector's downward cycle. They expect divergence among companies to widen, primarily driven by differences in their ability to operate income-generating assets and the proportion of non-performing assets on their books. Investors are advised to consider actively allocating to leading, blue-chip property enterprises.
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