Q & A on China Real Estate

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2008

Your humble author has been asked quite regularly of the following questions in recent times and for the convenience of all, their simple answers are listed below:

1)      Is China real estate a good buy now? = Yes IF you have a sufficiently long investment timeframe and no IF you do not. What is long? 6 years or more is long. What is short? 3 years or less is short. Anything in between are 50/50. Do NOTE the different markets (cities) in China could behave differently from one another and thus this highly generalized question means the answer here is also a highly generalized one. AND all generalizations are false, including this one. Read this past article = Not a Good Time to Speculate in China Real Estate = http://www.real-estate-tech.com/articles/SRS110701.htm.

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2)      Which market (city) is better or best? = IF only one can be mentioned, then it would be Shanghai. Yes, its real estate is already pricey, its land costs are high, and real estate developers are leaving for the presumably greener fields in the 2nd and 3td tier markets. BUT think about this = unless you are also a real estate developer, what has their leaving town got to do with you as an investor of (mostly) existing properties? Developers can still make a buck even if real estate prices do not go up assuming they get their calculations right because they have an element which you do not have, which is value creation via (re)development. But investors of existing properties need asset price appreciation. Think also this = fewer developers may mean fewer projects which in turn may mean better bargaining power for existing property owners assuming all else being equal. Read this past article = Shanghai is still a Real Estate Investment Favorite = http://www.real-estate-tech.com/articles/SRS090701.htm

 

3)      Which sector (residential, office etc) is best? = NO definitive answer here. Rule of thumb in terms of ascending sector complexity (i.e. to get a grip of) is Residential < Office < Retail < Hotel < Industrial.  Residential and the Office sectors are usually the relatively easier ones to understand and participate while Retail, Hotel, and Industrial (including warehouse, logistics center, factory etc) are harder to fathom. Unless you are in the business of the latter, better stick to residential and / or office.

 

4)      Chinese Yuan appreciation? = A Billion Euro question (dont want the greenback that much anymore, you know)! Your humble author does not recommend acquiring China real estate simply because one expects the Yuan to appreciate. One needs to ascertain China real estate on its own merits. IF one thinks fondly of the Yuan, just buy some. Read this past article = Reasons Not to include Currency Appreciation in Financial Analysis = http://www.real-estate-tech.com/articles/ret2Q08.pdf [3rd article in the newsletter].

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5)      China economy decoupled from the USA / Western economies? = this Decoupling theory sounds more like a marketing tune. Read this past article = Decoupling? What Decoupling? = http://www.real-estate-tech.com/articles/SRS020801.htm.

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6)      Objective of the austerity measures? = Dont feel like these are meant to make asset prices drop but just to slow them down, real estate included. Unintentionally pricking the bubbles, assuming they exist? Probable. Watch for opportunities in some of the luxury residential sectors.

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7)      What about Hong Kong? = what about it? Not unattractive but also not quite as attractive as before. Also, from a Euro standpoint, little profit is made despite real estate price gains in HK$ terms. Also a typical Hong Kong home has lost around 75% of its bartering power since 1997. Read this past article = Euro-Adjusted Indexes Indicate No Price Rise = http://www.real-estate-tech.com/articles/SRS020803.htm

Happy hunting!

Notes: 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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