China’s largest real estate broker and why you should short its shares
Evergrande isn’t the only Chinese real estate group facing an uncertain future. KE Holdings is too. Matthew Partridge explains how to short it.


One key structural feature of the Chinese economy over the past 15 years has been the booming property market. Thanks to a combination of rapid economic growth, loose monetary policy and Beijing’s decision to put housebuilding and construction at the forefront of a series of fiscal stimulus packages, the Chinese real estate sector is the largest in the world. Indeed, China’s property market is now worth twice as much as the US property market, even though the US economy is still 50% larger in dollar terms (and only slightly smaller when differences in purchasing power are accounted for). However, this boom seems about to come to a messy end.
Beijing has slammed on the brakes, restricting access to credit and tightening regulations, in a (belated) attempt to deflate the bubble. In the past, attempts to rein in the sector have ended without much impact, partly because the Chinese government feared that a slowdown in the sector would have too much of an impact on growth. However, the current crackdown seems more serious. Not only has the number of new building projects collapsed, but many Chinese property groups are now in trouble, most notably Evergrande, which technically defaulted last month, and is undergoing an official “restructuring”.
China’s property woes
While not quite on the scale of Evergrande, another company which stands to lose from the fallout is KE Holdings (NYSE: BEKE). It claims to be China’s largest real estate broker in terms of transaction numbers – according to its figures, its sales more than doubled between 2017 and 2020. As a result, its share price also doubled only a few months after it listed in the US in August 2020. However, its share price has since fallen by more than two-thirds, as doubts about Chinese property continue to grow. To add insult to injury, Muddy Waters Capital, run by noted short-seller Carson Block, published a report in December querying some of the figures KE has produced regarding sales and transactions.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Yet even if its figures are accurate, KE Holdings seems overvalued, trading at 35.4 times 2022 earnings. Assuming the Chinese real estate market doesn’t collapse (a big assumption, as things stand), KE’s growth is set to fall to a more modest 10% a year. Meanwhile it faces intense competition from other national brands, as well as local brokers, who are willing to charge a fraction of its 2% fee on every sale. Another concern is the fact that it is struggling to use its capital productively, producing a measly return on capital employed (ROCE) of around 2% a year. Unless it is able to increase this, its growth will effectively be destroying value.
Overall, with the share price still drifting lower I’d suggest shorting KE Holdings at the current price of $21.74 at £90 per $1. I’d cover your position if it rises above $32.74. This gives you a possible downside of ��990.
Trading techniques: the skyscraper index
Last October, as part of a crackdown on “speculative” real estate projects, the Chinese authorities ordered that local cities stop building “super high-rise buildings”. The ban was prompted by a number of cases where buildings had experienced problems (most notably in Shenzen, where people had to be evacuated from one skyscraper). Yet it’s somewhat ironic because tall buildings are also typically associated with stockmarket bubbles.
While there are various versions of the “skyscraper index”, the basic logic is that skyscrapers tend to be poor investments, producing low returns. So for skyscrapers to be built, their backers need to be driven more by vanity or irrational optimism, rather than commercial logic; there needs to be a dearth of more profitable and practical investment opportunities to exploit; and, since they are usually funded with borrowed money, credit also has to be widely and easily available (a key factor associated with bubbles).
There is anecdotal evidence to support the idea that the building of record-breaking towers coincides with market crashes. Construction of the Empire State Building began a few months after the Wall Street Crash, while the original World Trade Centre in New York and the Sears Tower in Chicago were both started in the early 1970s, just before another bear market. Dubai’s Burj Khalifa (currently the largest building in the world) was still being built during the global financial crisis.
However, a study in 2015 by Bruce Mizrach, Jason Barr, and Kusum Mundra of Rutgers University, comparing construction dates for the world’s highest buildings with changes in economic output, argued that such buildings tend to follow – rather than predict – the economic cycle.
How my tips have fared
Despite the recent market turbulence, my long tips haven’t done as badly as you might expect, with three rising and three falling. US homebuilder DR Horton fell below the stop-loss level of $88 (which means you would have automatically closed the position). Construction firm Morgan Sindall fell from 2,362p to 2,150p, while wealth manager Rathbone Group dropped from 2,060p to 1,866p. However, supermarket J Sainsbury went up from 279p to 285p, mobile phone group Airtel Africa rose from 135p to 149p, and bus company National Express rose from 255p to 264p. Counting DR Horton, my long tips are making a profit of £3,210, down from £3,823.
The overall performance of my long tips may have been disappointing, but the silver lining to the market turmoil is that my short tips moved in my favour, especially as technology and so-called meme stocks, have done particularly badly over the past fortnight. Online marketing group HubSpot fell from $530 to $455, US cinema chain AMC slid from $22.78 to $16.64, while remote medicine firm Teladoc went down from $79.80 to $73.18. Overall, my shorts are making a profit of £2,597.
Looking over the portfolio, I have five long tips (Morgan Sindall, Rathbone Group, J Sainsbury, Airtel Africa and National Express), plus four short tips (KE Holdings, HubSpot, AMC and Teladoc). While I wouldn’t suggest you close any of the current long positions, I’d raise the stop loss on Morgan Sindall to 1,875p (from 1,850p); on J Sainsbury to 1,550p (from 1,500p); on Airtel Africa to 105p (from 95p); and on National Express to 130p (from 123p). I’d also cut the price at which you cover your AMC short to $40 (from $45), and cover Teladoc at $150 (from $210).
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
-
M&S shares shift from frumpy to fabulous as pre-tax profits are up by 56%
M&S is performing strongly and has announced it will pay a dividend for the first time since the pandemic.
By Dr Matthew Partridge Published
-
The rise and fall of Sam Bankman-Fried – the “boy wonder of crypto”
Why the fate of Sam Bankman-Fried reminds us to be wary of digital tokens and unregulated financial intermediaries.
By Jane Lewis Published
-
It's time to back the yen, says Dominic Frisby
The Japanese yen has been weak for a long time, says Dominic Frisby. That may soon change.
By Dominic Frisby Published
-
What is FX trading?
Tutorials What is FX trading and can you make money from it? Rupert Hargreaves explains how it works and the risks.
By Rupert Hargreaves Last updated
-
The Burberry share price looks like a good bet
Tips The Burberry share price could be on the verge of a major upswing as the firm’s profits return to growth.
By Dr Matthew Partridge Published
-
Why you should short this satellite broadband company
Tips With an ill-considered business plan, satellite broadband company AST SpaceMobile is doomed to failure, says Matthew Partridge. Here's how to short the stock.
By Dr Matthew Partridge Published
-
It’s time to sell this stock
Tips Digital Realty’s data-storage business model is moribund, consumed by the rise of cloud computing. Here's how you could short the shares, says Matthew Partridge.
By Dr Matthew Partridge Published
-
Netflix has plenty of life in it yet – here's how to trade the shares
Tips Netflix still has plenty of scope for growth, says Matthew Partridge, and the shares are reasonably priced. Here's how to play the Netflix share price.
By Dr Matthew Partridge Published
-
Trading: Dunelm will keep growing, here's how to play it
Tips Furniture retailer Dunelm surged during the pandemic, but its shares have since fallen back. But it is well placed to take more market share from rivals, says Matthew Partridge. Here, he explains how to play the Dunelm share price.
By Dr Matthew Partridge Published
-
Ashtead – a building equipment rental firm on solid foundations
Tips The prospects for Ashtead, the building-equipment rental firm, are auspicious. Matthew Partridge explains the best way to play the share price.
By Dr Matthew Partridge Published