Shenzhen Residential: Which are the Better Neighborhoods to Invest?

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

September 2006

(Based on Data from Soufun)

We have looked at the residential price data from year 2005 and have done some rough statistical calculations based on them. These are what we have found and observed:

A)     The 6 major residential districts or neighborhoods are = Luohu, Futian, Nanshan, Yantian, Baoan, and Longgang.

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B)     The better neighborhoods looking from an investment return angle are = Futian, Nanshan, Baoan, and Luohu. Please note this is based simply on average prices per floor area and simple buying and selling, and does not include or refer to real estate development where gains can be made via value creation.

Here are the details and part of the rationale behind:

1)      The 6 major neighborhoods can be subdivided into roughly 3 subcategories based on prices per floor area (Yuan / m2) = a) the comparatively pricier neighborhoods of Futian and Nanshan; b) the comparatively mid range neighborhoods of Luohu and Yantian; and c) the comparatively affordable range neighborhoods of Baoan and Longgang.  The 3 subcategories also tend to demonstrate different price trend patterns as shown in the chart below.

2)      In terms of prices per floor area fluctuations (Yuan / m2) during 2005:

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Neighborhoods

Average

Minimum

Maximum

Luohu

   8,282

8,031

9,062

Futian

8,827

7,096

12,811

Nanshan

8,763

6,938

11,742

Yantian

8,015

5,850

9,779

Baoan

5,363

4,705

5,861

Longgang

5,173

4,225

6,121

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3)      In terms of investment return%, it is interesting to note = a) the comparatively pricier neighborhoods tend to provide the best results with Futian giving 49% and Nanshan giving 39%; b) the mid range neighborhoods offer the most lackluster results with Luohu giving 13% and Yantian offering even a negative (17%); and c) the affordable neighborhoods offer 24% to 25%.

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4)      We have also investigated the volatility via calculating the standard deviation and risk ratio = a) the pricier neighborhoods harbor the greatest figures implying a higher volatility and thus higher risk level all round; b) the mid range neighborhoods are mixed in that Luohu offers a significantly reduced risk level while Yantian is close to (a); and c) the affordable neighborhoods are also mixed in that Baoan offers a relatively lower risk level while Longgang is close to the higher risk ones.  A chart illustrating the investment return% and (volatility) risk ratio is listed below:

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Neighborhoods

Average(Av)

Std Dev

Std Dev / Av

Return%Ja-De05

 Luohu

               8,282

                 274

             0.0331

13%

 Futian

               8,827

               1,583

             0.1793

49%

 Nanshan

               8,763

               1,476

             0.1684

39%

 Yantian

               8,015

               1,233

             0.1538

-17%

 Baoan

               5,363

                 374

             0.0697

25%

 Longgang

               5,173

                 632

             0.1221

24%

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5)      We have plotted out the investment return% and risk ratio of the 6 neighborhoods graphically in charts = a) there appears to be no strong or significant correlation between return and risk as indicated by the R2 on the chart; and b) Futian, Nanshan, Baoan, and Luohu demonstrate better combinations of return and risk for any given level of risk. Should further / detail interpretation be required, it could be said that between Futian and Nanshan, Futian is better for it has a higher return% per unit of risk; between Luohu and Yantian, Luohu is obviously better as Yantian has a negative return; and between Baoan and Longgang, Baoan is better because for very similar levels of return, Baoan offers a significantly lower risk. Refer to the charts below:

 

6)      In terms of correlation, there are few significant ones between the neighborhoods apart from that between Futian and Nanshan and that between Baoan and Longgang.

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R2:

Luohu

Futian

Nanshan

Yantian

Baoan

Longgang

Luohu

1.00

 

 

 

 

 

Futian

0.13

1.00

 

 

 

 

Nanshan

0.02

0.67

1.00

 

 

 

Yantian

0.01

0.18

0.13

1.00

 

 

Baoan

0.15

0.25

0.20

0.14

1.00

 

Longgang

0.10

0.41

0.36

0.21

0.61

1.00

To summarize, it would not be overly prudent to view Shenzhen as one single uniform or unified residential real estate market, and knowing which neighborhood(s) to invest is vital to having viable investment results. What we have done here is simply to use the data for 1 year and seek to see if there is any insight or trend, notwithstanding what has happened in the past may not necessarily be repeated in the future and that 1 year is too short for verification. More detail studies and longer data periods are recommended, and proper professional consultation should be sought for individual investments.

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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