Making Sense of China Real Estate

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Is now a good time to consider investing in China real estate?

China’s national statistics bureau recently released data showing that prices for new homes in the 70 Chinese cities that it monitors dipped by an average 0.15 percent month-on-month in October. The trend seems to be clear, with housing prices falling in 34 of the cities in October — twice as many as in September. Since the release of October’s surprising data, numerous headlines – all with the same theme — suggest that now may not, in fact, be the right time to be looking at property investments. “Housing Prices Fall in Chinese Cities,” is the type of headline that scares off would-be investors.

Notwithstanding today’s headlines, though, investors need to ask: “Are they merely reporting yesterday’s story, and not picking up on current developments that may well lead to very different stories tomorrow?” Moreover, in a country the size of China, is it realistic to paint all real estate in the country with one brush?

After all, residential real estate prices in October for the 100 cities that make up the China Real Estate Index range from RMB 25,747 per square meter in Shenzhen at the high end, to RMB 3,120 per square meter in Hengshui at the low end. And Hengshui’s not alone. Residential real estate prices in twenty five of China’s top 100 cities are below RMB 5,000 per square meter.

Having lived in China for 20 years, I’ve at least heard of most major Chinese cities at one time or another, but I must admit, I had never heard of Hengshui before looking at housing prices. “This must be an out of the way, very small city,” I thought to myself. With my curiosity peaked, I went online and the first thing I learned is that Hengshui is renowned for those small snuff bottles with the intricate paintings inside that are found all over the markets in Beijing. Many of my overseas friends have made it a point over the years to buy as many snuff bottles as they could find when traveling to China to give as gifts back home.

Hengshui is located in Hebei, a neighboring province to Beijing, and has an urban population of 460,240, and a total population of 4,340,373. Not so small, after all. Not exactly out of the way, either. Situated in the southeast of Hebei, Hengshui is about 250 kilometers (155 miles) south of Beijing, where residential real estate sells for RMB 22,946 per square meter, or nearly ten times higher. If you don’t want to drive to the capital city, you can take a two-hour ride on the Beijing West high speed train. That’s about what it takes to travel by Amtrak from Philadelphia to New York City, and I know a lot of people who commute to their office in Manhattan from the City of Brotherly Love.

Facts like these are the reasons why many astute investors are looking at opportunities in China’s lesser known cities.

Commenting on the current investment climate, Carlo Sant’Albano, Chairman of Cushman & Wakefield LLP, a privately held company headquartered in New York City, said: “Even if China doesn’t grow at the predicted 8 to 10 percent, but at a figure 1 or 2 percent lower, there will still be tremendous growth. Furthermore, its economy will be increasingly focused on encouraging domestic consumption. Therefore, there is tremendous potential for growth, driven by the needs of domestic consumption.” Andy Zhang, Managing Director of Cushman & Wakefield China, added: “Although the market is challenging,we are now seeing more opportunities. Every year there is a huge population coming from the countryside into cities, and at a scale never previously experienced by any country.”

“The urbanization process could create a huge amount of wealth … and the real estate industry is the hothouse of the entire commerce,” said Jin Yanshi, former chief economist of Guojin Securities. The gross value of China’s real estate industry is more than 5 trillion yuan, while the value of the stock market is only about 2.5 trillion yuan, Jin said. Notably, about 23.5 percent of the 1,000 richest Chinese individuals’ fortunes comes from the property industry, up from last year’s 20.1 percent, according to the Hurun Rich List 2011.

What are the headlines likely to be in tomorrow’s papers? After 18 months of credit tightening and new home buying restrictions, we may be at the end of the cycle, and they are likely to be much different.

Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets, believes there is a 75 percent probability that housing restrictions will be eased by the second quarter of 2012. In a recent research update, Andy said: “While we expect to see policy easing by 2Q12, we don’t expect the Party to hold a press conference — that would only precipitate a big jump in sales and prices. Rather, by next summer we expect to learn that the Party has instructed local officials that they can quietly relax enforcement of some of the controls. The absence of a formal announcement won’t prevent home buyers, or equity investors, from quickly hearing about the policy changes.” In his previous update, Andy noted that bank lending data for October indicates that marginal credit easing is already underway.

Monetary easing, the potential lifting of housing restrictions, China’s continued growth, urbanization and the opportunities to be found in second-, third- and fourth-tier cities are all reasons why this indeed might be the right time to invest in China real estate. Who will be next on Hurun’s Rich List?

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