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Property Market Nearing a Trough?
Property Market Nearing a Trough? While some key economic indicators in China took a pause in July from their improving trend of recent months, we believe targeted policy stimulus will drive growth higher though the rest of the year and into 2015.
The domestic equity market has shrugged off the recent batch of weak numbers and the MSCI China A Share index has rallied 10% in the past month.
One of the factors weighing on economic performance recently is weakness in the property sector.
According to IMF calculations, the real estate sector together with construction accounts for 15% of GDP, a quarter of fixed asset investment and 14% of urban employment. The health of the property sector is therefore important to the health of the overall economy.
We believe that the property sector is going through an orderly correction and will near a trough in coming months as the effects of policy stimulus kicks in.
We believe the government has the capacity and the policy conviction to stimulate the property market and the broader economy into 2015.
ORDERLY PROPERTY MARKET CORRECTION
The Chinese property market is correcting. Price growth has moderated in year-on-year terms and on a month-on-month basis, more cities have reported declines than ever before. We believe the deterioration in July will prompt further policy stimulus that will lead to a turn in the property cycle. The government is determined to see economic growth measured in GDP terms hit 7.5% this year and is unlikely to let a downturn in the property market derail its plans.
Third tier cities suffering the most
The price moderation has been the most pronounced in third tier cities. Residential real estate inventories in third tier cities have increased the most. The oversupply is in part linked to local governments’ reliance on land sales to finance spending (see China Macro Monitor July 2014). Land is more easily available to developers in these cities as governments are keen to monetise their assets. We believe that reform in local government financing will reduce this source of supply over time.
Real estate investment has moderated, but shows signs of stabilisation
Real estate fixed asset investment accounts for about a quarter of total fixed asset investment. While its growth has been moderating, it has stabilised at a relatively high level of over 14% y-o-y over the past three months. According to IMF calculations, a 1% decline in real estate investment could shave off 0.1% of GDP growth in the first year1. China appears to be very far from seeing an actual decline in investment, but we would expect the government to be vigilant against any downturn that would threaten its growth targets. The IMF projects GDP growth of 7.4% this year, with real estate investment growth moderating to 5% y-o-y.
Property sales subdued while potential buyers wait on the side-lines
Potential buyers talking a ‘wait-and-see’ approach have been blamed for the decline in property sales. The pace of urban migration remains robust and pent-up demand to upgrade properties has certainly not fallen. With the threat of the malaise in the property market becoming self-fulfilling, we expect the government to offer further stimulus the break the cycle. Residential property sales had become less negative in June, but slipped further July alongside other measures of economic performance.
Low household leverage and continued urbanisation bode well for medium term property demand
China is little over 50% urbanised, significantly less than other emerging markets such as Brazil and Russia and will continue to urbanise at a strong pace over the coming 20 years. According to the United Nation’s projections, 310 million Chinese citizens (i.e. a population close to the size of the US today) will migrate from the countryside to cities over the next two decades. The Chinese government’s ambitions are even grander – to move close to 400 million people to the cities. That speed and scale of migration is unprecedented in human history. Even though a number of cities appear to be over-supplied with property today, we believe that excess supply will soon be absorbed.
Household indebtedness in China is also low by international standards. The orderly property market correction we foresee in China is unlikely to lead to a systemic problem for households because their financial leverage is relatively small.
We believe that such low level of indebtedness affords the government headroom to loosen house purchase restrictions (HPR) and lending criteria to stimulate the property market. As more Chinese people aspire to become homeowners, we are likely to see household leverage rise over time.
Policy relaxation will provide a tail-wind
In contrast to 2008 and 2011, when the People’s Bank of China cut the reserve requirement ratio (RRR) to stimulate lending activity across the board, recent stimulus has largely been left to local governments and is therefore highly targeted2.
For example, a number of cities have relaxed rules that previously prohibited households from owning more than one property (house purchase restrictions or HPRs). 37 out of 46 cities that had such restrictions have reportedly relaxed to some extent.
Some cities and provinces have announced tax subsidies to spur demand while others have been buying properties that have already been built to add to their pool of social housing.
The PBoC has also asked banks to speed up mortgage approvals and apply ‘reasonable’ pricing, which could quicken the pace of home sales. Anecdotal evidence from media reports point to banks following through on that request.
Changes to the loan-to-deposit ratio (LDR) made in July will also free up banks’ capacity to lend. By reducing the categories of lending that need to be included in the loan component and increasing the number of items that can be included in the deposit component, banks will be able to avoid hitting their LDR limits so easily, allowing them to lend more to prospective home buyers.
To support real estate development, the central government has increased its social housing target to 7 million units of new starts (of which 4.7 million units will come from shanty town renovation). The central government is also leaning on local governments to see that red-tape does not slow the process of fiscal disbursement and planning approvals.
The central government could go further by relaxing Hukou policies, which currently apply laws asymmetrically to migrants from the country and native city dwellers. Easing of these laws, could allow the freer movement of people ratio and cut mortgage interest rates (either as part of an overall cut in rates or independently).
Developers display cautious optimism
The annual decline in floor space started has been narrowing in recent months, in a sign that property developers are becoming more optimistic about future demand. Developers need to plan ahead of the actual turn given the lag between starting development and the actual completion of properties to sell in the market. Nevertheless, if their optimism proves to be timely, we could see the property market trough soon.
CHINA A SHARE SENTIMENT MARKEDLY IMPROVES
Despite the string of weak data in July, including disappointing loan and money supply growth, equity markets rallied. The MSCI China A Share index gained 9.5% last month.
The China A Share market is also likely to benefit from the launch of the Shanghai-Hong Kong Connect, which expected in October 2014 (see Shanghai-Hong Kong Stock Connect: A Boost For China A Shares) . The initiative will open up access to the Shanghai stock market for foreign investors trading through Hong Kong. Systems testing for the initiative will start at the end of this month. We believe that the manner in which the quotas are applied will drive net flows into the mainland. At the moment, dual-listed stocks are trading at approximately an 8% discount on the A shares market compared to the H share market. The introduction of the Shanghai-Hong Kong Connect should see that discount dissipate over time. Valuations of the China A share market indicate that it is cheap. Its prospective PE now stands at 10.2, 63% below its peak in 2007. It is not often that the stock market of one of the world’s largest and fastest growing economies is trading at one of the world’s lowest valuations. The imminent implementation of the Shanghai-Hong Kong Connect programme should help to speed the process of valuation normalisation.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
• Top Performer: Defence (+$7.87 billion)
• Emerging Themes: Cybersecurity (+$318 million), Uranium (+$253 million)
European thematic UCITS ETFs posted a dramatic resurgence in the first half of 2025, with net inflows of $8.73 billion year-to-date, according to ARK Invest Europe’s latest quarterly update detailing H1 2025 European thematic ETF flows.
The turnaround marks a decisive reversal from the muted flows of 2024 ($308 million net outflows for the whole of 2024), as investors rotate back into forward-looking, innovation-driven themes with clearer earnings visibility.
Defence remains the dominant thematic allocation, capturing $7.87 billion in combined net inflows between Global ($4.81 billion) and European ($3.05 billion) defence ETFs underscoring its evolution from a tactical trade to a structural portfolio allocation. Maintaining its position as the defining technological theme, AI ETFs saw $904 million in net inflows, with investor appetite fuelled by relentless innovation in large language models, robotics, and autonomous systems.
In the same period, Cybersecurity ETFs continued to rebuild momentum after significant outflows in 2024 ($311 million net outflows for H1 2024), drawing $318 million, reflecting growing investor conviction in cybersecurity as a structural necessity amid rising digital threats.
Clean Energy ETFs saw outflows of $307 million. As policy momentum stalls in key markets, investors are increasingly selective within the energy transition space. Capital is rotating toward subsectors with clearer economic moats, such as nuclear and grid infrastructure. Supporting this sentiment, Uranium ETFs rank fifth at $253 million, reflecting growing investor interest in the nuclear sector as a potential solution to global energy needs.
Healthcare Innovation ETFs recorded net outflows of $279 million. The drawdown reveals investor caution around legacy biotech firms with uncertain drug pipelines and reimbursement risks. Interest is shifting toward AI-driven healthcare platforms offering faster innovation cycles and more scalable business models.
Electric Vehicles and Battery Tech ETFs saw net outflows of $203 million as investor enthusiasm cools amid subsidy rollbacks and plateauing EV demand in major markets. Persistent concerns around battery raw materials and production bottlenecks have further weighed on the theme.
Rahul Bhushan says, “After a cautious 2024, it’s evident that investors are re-engaging with innovation themes that offer clearer earnings visibility and resilience in an increasingly complex macro landscape. We’re seeing investor conviction in megatrends with structural tailwinds, particularly defence, AI, and energy security. Thematics are no longer just tactical bets, they’re core strategic exposures.”
2025/2024 Comparative Study
Thematics are back
After a weak 2024, investor appetite for thematic risk has returned in force:
• H1 2025 total net inflows: +$8.74B
• That’s a sharp reversal from -$791M in H2 2024 and only +$483M in H1 2024
• The rotation is clear: capital is moving back into forward-looking themes with stronger earnings visibility.
Defence is now a structural trade
• Global and Europe Defence saw a combined $7.87B in inflows in H1 2025 and $1.59B in June alone.
• This continues a multi-quarter surge as geopolitical tensions, rising military budgets, and renewed industrial policy drive long-term allocations.
• Defence is no longer a tactical trade—it’s becoming a core exposure.
AI inflows normalise, but conviction remains
• Artificial Intelligence ETFs drew $904M in H1 2025, following $1.47B in H1 2024.
• Inflows may be slowing, but investor conviction is holding firm.
• With earnings delivery now catching up to narrative, AI remains a centrepiece of thematic portfolios.
Cybersecurity shows signs of stabilisation
After brutal outflows in 2024 (-$311M H1, -$260M H2), cybersecurity ETFs finally saw inflows:
• $318M in H1 2025, including $67M in June.
• This rebound suggests investors are once again prioritising digital resilience in an AI-driven world.
Infrastructure themes are quietly regaining traction
• Global and Europe Infrastructure ETFs pulled in $284M in H1 2025, following modest gains in H2 2024.
• Infrastructure is benefiting from government stimulus, defence modernisation, and the reshoring trade.
Uranium’s steady climb continues
• $253M in H1 2025, after $216M in H2 2024 and $67M in June alone.
• Indeed, the $67M in June alone nearly matches the $66M pulled in during the entirety of H1 2024.
• A rare clean energy theme that’s bucking the downtrend, reflecting growing recognition of nuclear as a pragmatic decarbonisation solution.
Clean Energy sentiment is so bad, it might be investable
• Outflows across all periods: -$307M (H1 2025), -$505M (H2 2024), -$409M (H1 2024)
• June 2025: A mere -$8M
• Sentiment is arguably as negative as it’s ever been—yet structural drivers remain in place. The setup for a contrarian rebound is building.
About ARK Invest Europe
ARK Invest International Ltd (”ARK Invest Europe”) is a specialist thematic ETF issuer offering investors access to a unique blend of active and index strategies focused on disruptive innovation and sustainability. Established following the acquisition of Rize ETF in September 2023 by ARK Investment Management LLC, ARK Invest Europe builds on over 40 years of expertise in identifying and investing in innovations that align financial performance with positive global impact.
Through its innovation pillar and the ”ARK” range of ETFs, ARK Invest focuses on companies leading and benefiting from transformative cross-sector innovations, including robotics, energy storage, multiomic sequencing, artificial intelligence, and blockchain technology. Meanwhile, its sustainability pillar, represented by the ”Rize by ARK Invest” range of ETFs, prioritises investment opportunities that reconcile growth with sustainability, advancing solutions that fuel prosperity while promoting environmental and social progress.
Headquartered in London, United Kingdom, ARK Invest Europe is dedicated to empowering investors with purposeful investment opportunities. For more information, please visit https://europe.ark-funds.com/
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