Daiwa Capital Markets has released a research report stating that since April, shares in China's property sector have rebounded more than 20% from their lows, primarily driven by the narrative that the market in first-tier cities (especially Shanghai) has bottomed out. However, the firm is not convinced this recovery signals a structural shift, as both developers and buyers currently lack confidence. The firm's top picks are CHINA RES LAND (01109) and CHINA OVERSEAS (00688), both rated "Buy."

The report explains that April's property sales exceeded expectations, particularly during the traditional off-season. Primary and secondary residential sales increased by 2.4% and 5.0% year-on-year, respectively. The recovery was especially pronounced in first-tier cities, where primary and secondary sales surged by approximately 20% and 14% year-on-year, with strong momentum continuing into the Labor Day holiday period. Concurrently, there were signs of stabilization in secondary market prices.

Nevertheless, the firm notes that the improvement in the secondary market was mainly driven by older, smaller, and dilapidated apartments with low prices and high rental yields. In contrast, sales of commodity housing priced above RMB 5 million have not shown a recovery, declining by 25% year-on-year. Furthermore, developers quickly capitalized on the improved market sentiment, with new pre-sale permits in Shanghai surging 70.8% year-on-year in April. However, few projects withdrew discounts, indicating a lack of confidence among both developers and buyers, which is a prerequisite for a structural and sustained recovery.

Daiwa believes that if the sales momentum in first-tier cities persists, sector stock prices could rise further in the short to medium term, but the risk of a pullback is also real. The firm prefers state-owned enterprise (SOE) developers with genuine exposure to first-tier city businesses over private developers, as the latter could face downgrade risks once the momentum subsides.