China Real Estate: between 100m and 200m in a 400m Dash

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

November 2007

Your humble author recently read an article in the newspaper saying that investors in China real estate have a hard time picking markets because there are some 656 cities and towns from which to choose in China.  

What baloney! Do you think foreign investors going into the USA markets will investigate and analyze ALL metros and cities in the USA prior to making an investment decision? Not even the American investors would do that let alone overseas ones. Likewise, the hefty fees and immense time required to do that aside, not to mention the lack of usable data in some (smaller) China markets, investors who do look at all available markets in China prior to investing are either nuts or have no common sense.  

Nonetheless, while hundreds of markets are somewhat a myth, dozens of real estate markets in China do exist, comprising the top tier, 2nd tier, and 3 tier cities. Indeed, many real estate investment groups have recently branched into the 2nd and 3rd tier cities citing expensive land in the top tier and booming emergence in the 2nd and 3rd tiers. However, your humble author thinks the longer trend and smarter strategy is to involve fewer, not more, cities. Heres why using the 400M dash as an analogy

A)    At the start point = China has already opened up its economy for close to 30 years and its real estate market as a whole, despite ups and downs and the vastly regional differences, is hardly at the start point.  

B)    At the 100-meter point = assume one takes a fast-click camera to record the status of the runners as they go past the 100m line, most, if not all, of the runners would (seem to) be crossing this point at roughly the same instance. The distances between them are minute to the point that the differences may not be easily recognized or observed. 

C)    At the 200-meter point = a photo shot at this point would likely indicate a tight race still yet some runners are obviously starting to drop behind while the rest race ahead. The distances between the runners are recognizable.  

D)    At the 300-meter point = a few of the runners would usually be in the lead while the rest fall further behind, dashing any hope of a win. Of those in the lead, probably it is still too early to tell who would be the winner. 

E)     At the 400-meter finish line = usually the race for the top winning title would involve no more than say 3 runners with the rest following in the back. One of these 3 would pick up the winner title.  

Correlating the above to picking real estate markets in China, your humble author thinks overall the China real estate market is somewhere between the 100m and 200m points. While an investor may recognize the significance of one or more of the top tier cities such as Shanghai, he or she also finds many of the 2nd and 3rd tier cities looking good with emerging populations and demographics and offering similar if not better returns. Every such city appears to have its own reasons to succeed, and while an investor may harbor a bias for city Y, he or she dares not leave city Z alone and unattended (and will likely invest a bit of money in city Z too just in case city Z also prospers).  

The above probably explains some of the (spread out) investment activities made by investment groups. Nonetheless, as the overall market matures and edges toward the finish line, which may be quite a while away still, there will be a few relative winners and many relative laggards.  

Hence, unless one is talking about a minimum total investment value of say US$10,000,000,000, pick no more than 10 cities at first and reduce these to 5 if you can. Less is more.

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