Reference Points on China Real Estate
Sometimes a picture of reality is formed from the accumulation of many small data points, perhaps insignificant in themselves, but together forming a compelling impression. I wanted to share a couple of interesting reference points I’ve come across in relation to China’s real estate market, and the question of whether there’s a bubble in that market.
The first is a fascinating interview I read in this month’s (January) issue of China International Business magazine with Zhang Xin, the CEO of SOHO China. Zhang is one of the best-known women in Chinese business, and her company is one of the country’s leading property developers, listed on the Hong Kong stock exchange (SEHK: 410). She is unambiguous in her belief that her industry is in the midst of a bubble:
We don’t really have a view on when it will end; [but] we do have a view that this is a bubble. Real estate is very much driven by government policy. This year we have RMB 4 trillion through the stimulus package, another RMB 6 trillion from municipal bonds, another RMB 10 trillion from bank loans. We have RMB 20 trillion in the system and it all finds its way to real estate. If the government next year decides to continue the relaxed monetary policy the market will continue like this, regardless of whether this is wasteful investment or not — people will still buy and we will still be building and selling.
These buildings are not fully occupied and people should be worried about it. I am sure the government is worried about it, but what do you do, they want the stimulus and if you want to create jobs then this is a by-product.
[Not to detract from her point, but I should note that I tally the total influx of funds somewhat differently. I think she is double-counting the RMB 4 trillion government stimulus, which was funded half by bank lending and half by municipal bonds. The combined figure, as I calculate it, is more like RMB 16 trillion, or US$2.4 trillion.]
In particular, Zhang points to the role of State-Owned Enterprises (SOEs) — flush with cash from stimulus lending, many of them with no prior experience in the real estate sector — in bidding up prices:
SOEs can be irrational. CEOs of SOEs have short tenures and often they are not quite matching with their responsibilities so their decisions can be short term focused. If you know that your tenure is only three years you want to maximize your achievements, so whether you buy this land at the highest price doesn’t matter because [it is] only finished down the road — and you are no longer there. That is why we are worried.
Today [December 3] there was an auction, look at this price, it’s crazy. It was down to two SOEs competing. [Nowadays] if we want to bid on residential land it is unlikely we will get it. It is so expensive and all the SOEs are bidding the prices up to the sky.
What I found even more striking that her observations on what she sees happening is how it is affecting her business strategy:
Basically . . . our strategy is to sell everything we have. The real estate business should really be looking at rental yield; build a building and then lease it out with the rent giving a decent return. But, because of where China is with asset bubbles, people want to buy the assets regardless of whether they can be leased out or not. People just want to hold [property], even if it is empty.
. . . Now, if you look at the prices for the property being sold versus the rent you collect there is a real disconnect. Prices are too high, rent is too low, so if you hold property in order to get yield you are likely to get very little. For us it makes no sense to hold property, so our strategy is to sell everything. We see ourselves very much as a manufacturer. We buy land, we build, and then we sell. And the asset bubble has compelled us to be even more of a manufacturer . . . the strategy is to keep a lot of cash, to sell as fast as possible, and to turn around assets faster — even faster than before.
That’s a rather remarkable statement coming from one of China’s most prominent and successful real estate developers. You can read the entire interview here.
The second reference point comes from Colliers International’s latest (3Q09) reports on the Beijing residential, office, and retail property markets. They show slumping rents in all three markets throughout 2009, a trend that, as Zhang Xin observed, is awfully tough to square with booming sale prices.
Figure 1: Rents of Beijing Luxury Residential Market by Sector
Figure 2: Rents of Beijing Office Market by Sector
Figure 3: Ground Floor Rents of Beijing Mid- to High-End Shopping Centers and Q-on-Q Growth
The third reference point comes courtesy of Aileen Chang, a regular reader of this blog. She’s posted an excellent six-part series on her own blog that offers some valuable insights into the Chinese property market, and I highly recommend checking it out. One of her central insights, which I absolutely agree with, is that both the supply of and demand for housing in China is highly segmented, and that there’s a severe mismatch between the kind of housing most people are demanding (for actual living purposes) and what is being provided (for investment purposes). She concludes that:
. . . increasingly more people cannot afford to live in the newly developed properties but some people has enough money to buy increasingly more new property. This is clearly not what a sustainable or healthy property market look like. [sic]
The fourth and last reference point is purely anecdotal, but interesting nonetheless. As I’ve mentioned before, I recently got a driver’s license and bought a car here in China, and have been driving it around Beijing. One of the things I’ve noticed is the number of touts passing out real estate flyers to motorists stopped at busy intersections throughout the city. The flyers aren’t for typical living quarters either — it’s all ultra-fancy top-end luxury developments they’re pitching. Apparently they figure anyone driving a car probably has cash they’re just dying to invest in real estate. It’s as though, at the peak of the dot-com bubble, you could buy shares in Yahoo! or Amazon.com from squeegee guys on the street. It certainly doesn’t prove anything about the state of the market, but definitely gives you a feel for the frothy mood out there.