China Residential Real Estate: A Critical Return & Risk Analysis
Real Estate Analysis Limited
¡@(Based on Data from the China Real Estate Index System CREIS)
to the China real estate markets would be awed by the scale and immensity of
the development activities taking place.
To put the overall picture in more down-to-earth terms, China is today
building the ¡¥equivalent¡¦ of a) 14,000,000 residential apartment units each
of 1,000 ft2 in floor area, b) 1,400 office towers each of 500,000 ft2 in
construction, and c) 1,120 retail malls each of 2,000,000 ft2 in size. And
these just relate to the commodity or private market sectors.
investors initially would also tend to treat China as one single uniform
market especially given its background in planned economy.
Nonetheless, after having opened up its borders and economy some 28 years
ago, this notion, even if it had been true at some point in time, does not
stand too well to scrutiny. While real estate markets do share certain
common traits, different cities would also harbor different characteristics
given their varying stages of economic growth.
Here we are
going to look at these 10 major markets in China and their residential real
estate market performances
and we have included brief descriptions of these cities at the end of this
analysis for convenience: Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin,
Wuhan, Chongqing, Nanjing, Hangzhou, and Chengdu. And here is a summarized
market performance index chart on these 10 cities:
chart, one can observe, quite obviously, that Shanghai, which was the
leading market for a few years since 2002, has been overtaken by Shenzhen in
which overall performance and price level has jumped some 40% or more since
early this year. Beijing having been in the shadows of Shanghai for quite a
while has also seen increased prices and transactions albeit at a slower
pace than Shenzhen. Of the Big Four, namely Beijing, Shanghai, Guangzhou,
and Shenzhen, Guangzhou has somewhat been a laggard although it has also
seen increases in market activities.
remaining markets, mostly prominent 2nd tier cities, Tianjin
appears to have followed the footsteps of Beijing in seeing more market
activities and price increases.
The others in this category have mixed results with some edging up a bit and
some straggling and struggling along. We have also looked at some rounded
average prices per square meter (Yuan / m2) for each of these markets based
on transacted properties in August 2006 [a technical note: these average
unit prices could contain skews in that a market where there are more luxury
transactions would have a higher unit price during the period while another
with more ordinary grade transactions would see a lower unit price in the
Market / City
Yuan / m2
Market / City
Yuan / m2
such as unit prices, required total investment sums, property location,
terms of financing, building quality, target tenant group, management
arrangement, and the like could be important when contemplating which market
and / or project to invest, making reference to macro aspects such as
potential return and risk is also vital.
performed simple macro analyses on the return and risk characteristics of
these 10 residential real estate markets and are glad to share them with
Essentially, we have measured the overall return, based on the indexes and
expressed as a percentages, for the past 12 months or so leading up to
September 2006 for each of the markets and at the same time, we also
calculated the volatility of the markets during such period using their
respective indexes. Hence, we would end up with a set of return and
volatility (reflecting risk) figures for each market thus enabling
comparison among them. Here are the relevant charts:
The above 2
charts are actually the same though we think they would be easier to
comprehend if the city names are presented separately.
Two observations almost immediately stand out: 1) Shenzhen leads the
pack in terms of return offering 55% while the next one in line, Beijing,
does not even come close giving only 23% or so; and 2) the motto of the
higher the risk, the higher the return (and vice versa) apparently holds
some truth in this case, as indicated by the correlation factor R2 which is
0.66 between return and volatility (risk). Please note these trends only
represent what had occurred in the past 12 months and as such may or may not
continue to hold true. Also, the return measure has not taken into account
items such as transaction costs, taxes, rental income yields, and the like
and is just a simple measure of buying for $X last year and selling for $Y
today (if Y is larger than X, a profit is made, if not, a loss is incurred).
similar charts can also help investors select markets.
Using the foregoing charts as examples, while Shenzhen offers the highest
return of them all, not all investors would have the stomach or desire to
take on also the highest risk which Shenzhen offers. Stating the obvious,
investment implies seeking and selecting investment opportunities which
offer the highest possible return for a certain given level of risk. As
such, while a high risk tolerant investor may go for Shenzhen, a less risk
tolerant investor would want the other markets. For instance, and referring
to the chart with the city names, while both Chengdu and Wuhan harbor the
same level of risk (x-axis), Wuhan offers a higher return (y-axis). That is
to say, an investor with that level of risk tolerance should focus more on
Wuhan than Chengdu. The same principle applies when considering and
comparing the other markets.
trends be different if the observation periods are longer say 5 years
instead of 1? You bet!
We have done similar analytical studies on the markets going back all the
way to 2000 or prior and the results were not the same. For instance, you
may find Shanghai ruling the pack instead of Shenzhen. Not only that, while
there are certain synchronizations between most of the China real estate
markets studied, they may not be highly or perfectly correlated, implying
leads and lags in between. Shrewd investors may find such patterns to be an
calls for another analysis at another time.
The article and/or content contained herein are for general reference only
and are not meant to substitute for proper professional advice and/or due
diligence. The author(s) and Zeppelin, including its staff, associates,
consultants, executives and the like do not accept any responsibility or
liability for losses, damages, claims and the like arising out of the use or
reference to the content contained herein.
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