China Field Visit 2 – Property Prices

Kwang-tung or broadly interpreted as the Broad East, is the province Western traders visited it as early as sixteen hundred years ago, and for centuries it was the only point of contact between China and other countries.

From my first visit point from Nan-hai, Zhong-san, Hua-du and Kwang-chow, I see no apparent sign of slow-down in property development in this province. I am not too sure if this is a sign of over-heating either even though the prices have climbed to a level that far exceeded local earnings power. Majority are still earning less than RMB1,500 with a wage floor of RMB790, a law rarely observed. Prices are “still not affordable for ordinary people,” four government agencies said in a joint statement. “The key to revitalizing the real-estate market is to set reasonable prices,” the housing ministry, finance ministry, central bank and the National Development and Reform Commission said.

My conversation with couple of people in Zhong-san in particular, reveals that Kwang-tung’s property market rebounded in the first quarter with expanding transaction volumes. Developers are taking the opportunity to raise prices, yet higher prices yet to dampen demand. I was told that residential property sales are strong, though the commercial market remained weak, with sales of office property down.

I wonder who are the buyers? In the early 2008 bubbling property market, authorities conveyed to potential house buyers that they would be wise to hold off. Now the government is telling them it's not just okay to buy, it would be a great time to buy and the banks will be happy to lend to you. A series of supportive measures, combined with aggressive interest rate cuts and accelerated price reductions from October have begun to lure some Chinese homebuyers from the sidelines, bringing higher transaction volumes in the recent months.

Cities like Shanghai, Guangzhou, Shenzhen, and Beijing are awash again in a sea of cranes and high-rise building construction. While the correction in the Chinese real estate market may not be over, numerous fundamental issues will create one of the most lucrative investment opportunities that we have seen in recent times. The Chinese government has already fired the first salvo with a $585 billion infrastructure stimulus package, equal to 20% of total GDP in 2008.

Also to note that Chinese banks do not have the exposure to sub-prime loans and toxic debt that other markets have. In fact, the exact opposite is true as Chinese banks typically demand a 30% down payment for residential property and up to 50% for commercial property.

The demand for housing in China far outstrips supply with an estimated shortfall of 6.8 million units. This stands in stark contrast to the U.S., where 20 million homes stand empty. I see opportunity if we skewed the investment strategy to be more heavily weighted toward multifamily, mid-tier residential developments as opposed to commercial.