China Real Estate Lags but Stays in the Race

Recently, I've discussed upcoming Chinese real estate IPOs in Hong Kong. I discussed the strategy of Evergrande, which sought to take on debt and build up a land bank before the IPO. Previously, investors had bid up shares in companies with sizable land holdings, but there was some concern that investors would be more focused on the balance sheet.

At the end of October, Evergrande raised more than HK$5 billion, with strong retail demand, but as I noted, another IPO failed (Mingfa reduced its offering by 20% because of weak demand), and a third was pulled.

It appeared that investors' appetite for Chinese real estate was sated and that they were concerned about debt, but that was the incorrect conclusion, as the South China Morning Post makes abundantly clear in their headline today: "Debt-heavy Evergrande marks first trading day with 34.3pc gain."

Shares debuted on Thursday, and in today's trading they gave back only 2.55%.

While a failure of Evergrande would have been a blow to the industry, its success didn't cause real estate to lead the market -- Claymore/AlphaShares China Real Estate (TAO - commentary - Trade Now) lagged both iShares FTSE/Xinhua China 25 (FXI - commentary - Trade Now) and Claymore/AlphaShares China Small Cap (HAO - commentary - Trade Now) yesterday. Investors are becoming choosier in the real estate sector, and the performance of TAO reflects it, but overall demand for Chinese stocks has pushed all these funds back near their 52-week highs.

The H-share index was up 1.7% overnight, and the Hang Seng added 1.6%, but lower stock prices in Europe and the U.S. weighed on these ETFs in early trading, and all three were down at around 10:30 a.m., though FXI was down the least and TAO was down the most.

I still prefer HAO for the long term, but the short-term trend favors FXI -- it briefly traded at a new 52-week high this morning.

At the time of publication, Dion had no positions in stocks mentioned.

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Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.