China Real Estate: Asymmetry

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

December 2008

Your humble author has recently participated in a China real estate conference held in Shanghai. Not only was he a speaker, he was also a member of the organizing team. Close to 200 attendees signed up which was about the venue maximum capacity anyway, not bad given the current market sentiment. Yours truly gave a talk titled China Real Estate Black Swan? which power point could be viewed here =

One point raised in the presentation is asymmetry. Put simply, in the many years ahead, not all China real estate markets (cities) will deliver good investment returns. Some will and some will not. There will be winners and laggards in each category of cities by status, scale, and nature (global, regional, local, big, medium, small, financial, industrial, recreational etc). It is not so much whether a financial city will do better than an industrial city, but whether the one(s) you pick is the winner in the particular category. Note also asymmetry in this context is also NOT about price differentials e.g. 1st tier cities having pricier real estate than 2nd tier ones.

Why did we raise this point? Because many of the market forecasts and media commentaries on China real estate nowadays collectively appear to give an impression that (almost) all markets will do well given and over time. We think this could be delusional.

Why do we think it delusional? Reasons:

A)     There are not sufficient resources or demand, global or otherwise, to enable all the cities to emerge as winners (or to become what they aspire to become) = Take the USA as an example, despite being the largest economy on Earth and after more than 2 centuries of growth, it has only a couple of international centers, a few influential regional hubs, and a handful of vital local cities.

Readers may argue that China has more than 4 times the population, thus implying China can afford to have several international centers, tens of regional hubs, and dozens of local cities. BUT population is the wrong way to do the pro-rata. Perhaps GDP is a better pro-rata measure as cities are largely connected with economic activities which are reflected in the GDP data. Read our earlier analysis:

China GDP per capita: Time required to catch up with the USA

B)     China is no longer at the starting point of economic development = in fact 30 years have past since China opened up the economy. Naturally, the real estate market we are seeing now did not prop up until much later and subjectively, one may say its more meaningful form might have started halfway during the past 30 years, i.e. around 15 years ago in the mid 1990s. Some may even say no more than 10 years counting from the day individuals (instead of their work units or companies) were encouraged to buy (residential) real estate.

In any event, just as the stronger 400m dash runners started to take a lead over the weaker competitors at the 200m point, we think the same will happen in China real estate. Read our earlier analysis:

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

C)     Urbanize just to urbanize leads to slums = not winning cities. If one reads regularly the market reports and media articles on China real estate, urbanization is very often touted as one of the reasons for optimism on real estate prices.

Perhaps people connect urbanization to having more urban residents which means higher demand for real estate which in turn means higher prices and rentals.

Yet, this is putting the cart before the horse. Cities happen for one or more reasons, economics generally being one. It is economics (or its performance) which drives urbanization and thus real estate (prices) i.e. both urbanization and real estate performance are the results or reflections of the economy, not one being the factor of the other. Without economics, having just more people is rather meaningless in terms of real estate.

By the way, one other speaker at the conference queried the huge scale of such rural to urban migration, thus the scale of urbanization. We think he has got a good point.

Which markets (cities) in China will likely be the winners? This is a $$$ question requiring a $$$ fee. Honestly, you really dont expect us to divulge so much in a freely accessed article, right? It would not be fair to some of our customers too.

Nonetheless, as Christmas is soon upon us, and as a Christmas present [do note our disclaimer notes though], refer to the accompanying photo (or our power point presentation linked above) for a clue.

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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