Chinese property prices may be on a tear, but it's time to pull back on exposure to developers' stocks amid a stockpile of unsold supply, Goldman Sachs said.

The bank cut its exposure to the shares from overweight to market-weight, citing in part the sector's 14 percentage-point outperformance compared with the MSCI China (: .MICN0000NGUS) index over the past year.

Goldman said it was also concerned that government policy on property may become less supportive, with prices in higher-tier cities having surged over the past year, prompting some cities to introduce cooling measures. The bank noted that tier-one cities accounted for about 30 percent of the net asset value (NAV) for the developers it covered.

Despite long-running fears over a potential supply glut, China's property prices have had an inexorable climb. In April, home prices in 100 cities rose an average 9 percent from a year earlier, after rising 7.4 percent on-year in March, according to a poll from the China Real Estate Index System (CREIS), Reuters reported. The 10 biggest cities, including Shenzhen and Shanghai, saw prices rise 14.4 percent on-year in April, the report said.

But Goldman estimated that the market was only about a third of the way into destocking property supply nationwide, citing CREIS data that showed inventory in tier one, two and three cities had fallen from peaks of 19-23 months' worth of supply to around 8-10 months currently.

While that sounds positive for property pricing, Goldman noted the gross floor area (GFA), or current residential supply for sale, in the CREIS data set represented only about 2.6 percent of the residential GFA under construction nationwide.

"The aggregate inventory overhang remains significant, especially in lower-tier cities and in the commercial/office segments, where 10 years may be needed to digest the potential supply," Goldman said.

That doesn't mean Goldman expects a spillover effect on banks, noting that mortgage loans were only about 16 percent of banks' total loan books as of 2014, among the lowest of major global peers. The loan-to-value ratio of those loans remained low and mortgage-backed securitization wasn't widespread, Goldman said in its report.

Among the developer stocks, Goldman said it preferred stocks of companies focused on destocking and operational improvement, such as Agile, Shimao (Hong Kong Stock Exchange: 813-HK) and Yanlord (Singapore Exchange: YNLG-SG). It also liked names with the ability to gain market share, such as China Overseas Land (Hong Kong Stock Exchange: 688-HK) and Country Garden (Hong Kong Stock Exchange: 2007-HK), and those with high exposure to strong markets, such as Sino Ocean (Hong Kong Stock Exchange: 3377-HK), Sunac (Hong Kong Stock Exchange: 1918-HK) and China Resources Land (Hong Kong Stock Exchange: 1109-HK).