China Real Estate: NOT a Good Time to Speculate
Real Estate Analysis Limited
because the return to risk ratio has become less appealing for relatively
short investment timeframes.
For instance, if one invests $100 and gets to profit $50 or lose $50 say in
equal probabilities, then the return to risk ratio would only be 1.
Naturally ratios less than 1 are worse. Then what is a good ratio? There is
no fixed answer yet subjectively perhaps something like a 2 would be better
i.e. winning > losing.
clarity, first your humble author is only saying NOW is not a good time to
be speculative, not all the time.
Second, he is not against speculation provided it is done say professionally
in the broadest sense of the word. Also, speculation confers a sense of
short investment timeframe yet adjectives such as short, medium, or long
term could mean different things to different people. To avoid confusion,
here we define it as a timeframe less than 3 years.
is a better or more appropriate investment timeframe for now? Say 5 to 6
years or better still, in an idea sort of way, 10 years.
YEARS?! Some of you would probably be screaming by now, who have such
patience? Nonetheless, real estate development and investment to some extent
are usually long term endeavors and do not speed up just because we do not
have the patience. If one wishes to speculate on China real estate in this
¡§round¡¨, they should have started earlier say in 2004 or even 2001 (read our
past article = Double your Money by Investing in Beijing and Shanghai Real
Estate written in August 2001
10 years is also necessary to capture the ¡¥golden years¡¦ which are
subjectively expected of and offered by a few markets in years to come; the
impatience will not be able to benefit from these, nor will be the easily
a timeframe less than 3 years is not desirable? This is because the risk has
overall increased for the less patient investors.
Do note this is NOT the same as saying that real estate prices will not go
up (they will likely continue to go up at the time of writing this article),
it is just that the return will be matched by a proportionately increased
risk. And why do we think in this way? Here are the angles:
= while China real estate markets are not the priciest in nominal terms
compared to other markets in the world nor are they the most bubbly, they do
nonetheless belong to the proportionately pricey category when compared with
other markets in the world. How much proportionately pricier? Say by 30% to
50%. Some may argue that e.g. Shanghai real estate prices are still only a
fraction of London but this misses the point that when adjustments come to
London, Shanghai would be affected too keeping the differential between them
more or less stable within a certain period.
= some investors think that the strong China reserves, the high saving
rates, the reasonable employment rate, the increasing income, and / or the
2008 Olympics would prevent any significant price adjustments from
occurring. This always appears sound reasoning BUT similar descriptions
could have been used to argue way back in 1997 that Hong Kong asset prices,
despite being then sky high, would not suffer much from any financial
adjustment or crisis. Naturally we know the answer now = having a lot of
money in the system with lots of wealthy folks will NOT help avoid financial
crises. One reason is because investors do not enter the market to save it
from falling but to profit from it. As long as a profiting expectation
remains absent, not even the billionaires would invest let alone the common
folks. In any event, much of the current good fundamentals are brought by
the US$ printing press leading to an oversupply of cash (against assets).
/ Trend Angle
= especially with residential real estate, there does not appear to be a
worrisome oversupply situation based on a number of new units to number of
households measurement. However, there could be product mismatches and
non-equilibriums in some markets. On a price to income basis, the price
incremental rate is more or less matched by a comparable income incremental
rate although one may always suspect the price to be out of the income range
to begin with. However, some markets appear to have faster increments in
recent years which mean the volatilities have become bigger which in turn
implies higher risks.
= whether via published information or via business encounters with some
Mainland businesses, it appears that many, if not the majority, in China are
not only very optimistic of China economic prospects (count your humble
author as one too), they are also thinking in a straight-line up fashion
(count your humble author out), yet markets seldom behave linearly up or
up, notwithstanding upward price trends, the time has come for considering
the issue of [profit x frequency x probability] versus [loss x frequency x
probability], i.e. their respective total impacts.
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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