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Reference Points on China Real Estate

January 30, 2010

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] 

Aileen also offers some revealing comparisons between the Chinese and South Korean property markets, and presents a nice summary of her key conclusions here.

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 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.

13 Comments leave one →
  1. January 30, 2010 10:06 pm

    Great stuff, Patrick. Thanks.

  2. January 30, 2010 11:15 pm

    Nice post, but timing is everything and people have been complaining about irrational SOE bidders for awhile now. Zhang Xin is smart enough to say “we don’t really have a view on when it will end.”

    (Those Snap previews things are awful and I recommend you get rid of them.)

  3. Bob_in_MA permalink
    January 31, 2010 12:56 am

    Zhang Xin: “Basically . . . our strategy is to sell everything we have.”

    This is reminiscent of Sam Zell selling Equity Office Properties Trust, which he owned for over 30 years, in February 2007 in a highly leveraged deal.

    I don’t remember anyone here involved in real real estate calling it a bubble, but many acted as if they saw a peak. MetLife sold the now notorious Peter Cooper Village and Stuyvesant Town apartment complex for $5B in October 2006.

    One other parallel I find pretty amusing: bulls pointing to very low default rates. Default rates on subprime loans here were at historic lows during the bubble, anyone in trouble could easily refinance or sell at a profit.

    In some ways, the situation in China is much more extreme, the amounts talked about are really staggering. RMB 6 trillion in municipal bonds, ca. $850B in a year or two? The total outstanding municipal bond market here is $2T.

    China is clearly in the dance-until-the-music-stops phase. Who knows how long it will last? But when it ends, you can be sure the powers-that-be will be on TV explaining how no one could have seen the bust coming.

  4. Bill permalink
    January 31, 2010 4:03 am

    We must remind ourselves that the Chinese government uses economic policies, and others, to sustain their reign. If they few their reign is threatened, however slightly, they will adjust their policies – economic, foreign, culture, health, environment, whatever, to ensure that they stay in power. Therefore, if there is a bubble coming, and if the Chinese government thinks it may trigger discontent of Chinese, you can be rest assure that the Chinese government will adjust its policies so that the bubble will not burst. If continue the stimulus will ensure the bubble won’t burst, you know they will continue the stimulus. If the bubble is burst, one should be prepared for some very drastic measures, including starting some international conflict, a la Olympic Torch scenario, just toe make sure the people are on the government’s side.

  5. greg permalink
    January 31, 2010 11:06 am


    Let me first say: I definitely see there is a real estate bubble in China’s richest cities. And pretty much everyone I met in China says the property price is too high.

    But, let’s not exaggerate and believe easily some false numbers in order to reinforce our conviction, whatever that is (e.g., China’s economy is not for real and will fail, like Japan, etc.)

    For example, the stimulus figures quoted in the article is way, way exaggerated. The RMB 4 trn stimulus are not all from the central government’s budget. In fact, only RMB 1 trn is, with the rest from local government budget and bank loans. There isn’t any RMB 6 trn municipal bonds in China. By law, the local government can not issue municipal bonds. That is why the central government borrowed RMB 200 bn on behalf of the local government and distribute the funds to local governments in order for them to support the stimulus projects. Sure, local governments actually borrow from back channel, using government-supported companies. But that borrowed amounts were counted in the total bank loan of last year, which is just below RMB 10 trn.

    So we’re talking about RMB 11 trn not RMB 20 trn in the system as claimed by Zhang Xin. I trust Zhang Xin’s experiences and observations of the Chinese real estate market, but she is not an economist …

    Oh, by the way, China is much more than the few first-tier cities.

  6. January 31, 2010 11:51 am

    The problem with thinking that the government can permanently stay ahead of the bubble bursting is that at some point incompetence and selfish mismanagement take over and a great deal of people are left suffering. They can only balance for so long, before they fall.

  7. Bob_in_MA permalink
    February 1, 2010 5:56 am


    I cede the point, but I assumed she didn’t mean municipal bonds per se. For instance, I’ve read of bizarrely structured joint ventures that include municipal and regional governments to circumvent the no-bond rule.

    No offense, but I really don’t believe anyone outside a small circle of officialdom has any idea of the debt exposure of the different parts of the Chinese economy.

    The writing is on the wall and the smart people are selling, or at least hedging their risk. Meanwhile, the sanguine multitudes quibble about why this or that doesn’t matter. In China 2010 we here how it is only some markets in Beijing, Shanghai and other first tier cities. In the U.S. in 2006, we heard how it was just California, Florida, and a few other markets.

    Tell that to the people of Michigan, Indiana and Ohio. 😉

  8. Duncan permalink
    February 1, 2010 9:10 am

    Figures from one of the other real estate developers I’ve seen show much the same trend in rentals for high end flats as the ones for Beijing above. In fact the only one of about 15 big cities covered that didn’t see rentals plateaued even while prices were skyrocketing was Chongqing. Go figure. But I do know prices are relatively cheap there vs other cities.

  9. February 1, 2010 10:35 pm

    I can’t argue with the bubble theories.


    Don’t these things always bust when everyone is least expecting it? It seems like the chorus of voices calling for the bubble to burst may have to be proven wrong yet again before this thing flames out.

    When Zhang Xin says “maybe this time it really is different”, then we’ll know the top is in.


  1. China Real Estate: The Bubble Will Pop. | Manufacturer China
  2. Monthly Review: January 2010 « U.PRO.FISH
  3. Foreign Policy: China’s Bubble Trouble « Patrick Chovanec
  4. Foreign Policy: China’s Bubble Trouble « Patrick Chovanec

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