China: Some Macro Residential Real Estate Numbers

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2004 

Based on media news and published reports, e.g. the Blue Book of Real Estate, one would sense that collectively the residential real estate markets are huge. Nonetheless, when taking into account the 1,200,000,000 population, some numbers do not feel that staggering. Here are a few observations based on the commodity (private market) residential real estate sector in the top 40 cities:

A)     Construction volume completed in 2003 = 322,000,000 m2 or close to 3,500,000,000 m2 of floor area with the Eastern / Seaboard region occupying close to 60% of the volume. The remaining 2 regions i.e. the Central and Western regions shared the rest by roughly 50 / 50. How significant is 3.50B m2 of floor space? Assuming 1,000 m2 per residential unit, then we are looking at on an order of magnitude level some 3,500,000 homes (the USA produces around half the number). One may say this number is not entirely impressive as China has 4 times the population of USA yet produces only twice as many homes as in the USA. While this is not incorrect, the majority of people in China are still relatively poor (Chinas GDP per capita is just US$1,000 while the USAs is US$30,000 or thereabouts) and perhaps a private residential real estate market of any meaning exists only among the top 25% to 30% of the population. This production volume is not insignificant, especially when one considers that another 325,000,000 m2 or 3,600,000,000 m2 of floor space were started in 2003.

B)     Floor area sold in 2003 = 285,000,000 m2 or close to 3,100,000,000 m2 of floor area with the Eastern / Seaboard region taking some 61% of the transactions while the remaining two regions shared the rest 50 / 50. Using the same assumptions as above, this amounts to roughly 3,100,000 homes, and the sold to completed ratio is around 88% (please note however some of the sold floor area might have been completed in earlier years).

C)    Cumulative vacant floor area = 83,360,000 m2 or close to 900,000,000 m2, amounting to an equivalent of 900,000 units of home using the same assumptions as above. Geographically, 61% of the vacant space is located in the Eastern / Seaboard region. The rest is shared by the Central and Western regions in a ratio of 21 to 16 respectively. Assuming an average household of say 4 people, there are more than 300,000,000 households in China, and out of which say 1/3 is urban enough to have a meaningful residential real estate market, we are looking at a ratio of 900,000 / 100,000,000 = 0.90%. Naturally, the distribution is unlikely to be even.  

D)    Capital Invested = 1,310,000,000,000 Yuan or around US$158,000,000,000, noting this figure includes both commodity and non-commodity real estate investments. Using the same ratio of 66% that was observed in 2001 and 2002 for the commodity residential real estate sector, around 865,000,000,000 Yuan or US$104,000,000,000 would have been spent in 2003. Dividing this money figure by the floor area commenced in 2003, the average cost per floor area was around 2,661 Yuan per m2 (which is quite close to the average price per m2, perhaps implying a tough market).

E)     32,618 real estate developers = this was the 2002 figure and the 2003 figure is expected to be higher even if only slightly. Most are China-bred companies and are relatively small in terms of capitalization. It is not unreasonable to expect many of these companies would either go out of business or leave the real estate industry given the recent tightening of related finance-liquidity, laws, and supply.

Summing up, the China residential real estate market production-supply numbers are huge on their own yet do not seem overly anxious given the vast population and looking from a longer term angle. Nonetheless, some form of bubble, short run perhaps, may exist in certain cities as supply can be uneven. Furthermore, the average price per floor area sold being close to the overall production cost per floor area suggests a very competitive and tough market yet with most / many developers still expecting prices to go up further in years to come despite there is no or little money to be made based simply on todays prices, thus implying and increasing the bubble possibility.

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