Chinese property too hot for short sellers

An unexpected thirst for real estate by Chinese insurers has seen short sellers continue their retreat from the sector as falling equities and deregulation fuel an increased appetite for local property empires.

• Chinese property companies in high demand despite fears of the market overheating
• Short interest across China's largest homebuilders the lowest seen in 12 months
• Developer Evergrande's debt pile continues to grow as firm acquires financial assets

From the Waldorf Astoria to China's largest homebuilder, Chinese insurers continue to bulk up their real estate exposure supporting stock prices and sending short sellers covering.

Slumping equity markets saw concerns of fewer Chinese buyers in international residential markets materialise in 2015 but Chinese corporates continue to aggressively seek assets both abroad and locally. Anbang, once a simple chinese car insurance business, has just pipped Marriot to the post with a $13bn bid for Sheraton owner; Starwood Hotels & Resorts.

Deregulation by the Chinese government has allowed for increased investment allocation by Chinese insurance firms in real estate. Volaitliy in Chinese markets has seen companies eager to splurge on foreign acquisitions ramp up their efforts - but this has also been accompanied with a soaring demand for investment in local Chinese property developers.

Adding to the property fever is real estate firms that are borrowing to fund the acquisition of their own shares creating an environment that has become untenable for short sellers. Additionally, a recent four week rally in shares has lifted markets.

Average short interest across the largest real estate developers listed in Hong Kong and China has decreased over a third since the highs of 2015.

The most shorted developer at the start of the year was China Vanke with 14% of its shares sold. The percentage of shares outstanding on loan or short interest has subsequently declined by over two thirds to 3.3%.

Shares in Vanke were suspended in December at the request of the firm pending a resturcturing and possibly part of efforts to fend off a hostile takeover from insurance firm and major shareholder Baoneng.

Vanke's Shenzen listed shares remain suspended pending the restructuing, with Hong Shares resuming trading in January. Meanwhile, Vanke announced this week a bid to acquire a stake in the Shenzhen Metro (through share issuance) as part of restructuring efforts and analyts speculate this forms part of the efforts to fend off Baoneng.

Instead, Vanke has welcomed recent moves by Anbang (referred above), who has increased their stake in the homebuilder from 4.5% to 7.0%.

Shorts have also been seen giving up positions in the second largest residential developer in China, Evergrande Real Estate Group. Currently the most shorted with 6.5% short interest, shares were down by 29% in February after the stock was downgraded but have since recovered and are down 7% year to date.

Shares were initially lower after the stock was shunned by analysts as the company splashed out on a Hong Kong office tower for ~$1.6bn, adding to Evergrande's profile as the most indebted Chinese developer.

Third most shorted Chinese developer is currently Poly Property Group which has seen shorts reduce positions by 40% in the past six months. Shares have hovered after diving by 40% in 2015, yet since early February shares have rallied 20% with short sellers trimming positions by 15%.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.