China Real Estate: Asymmetry
Real Estate Analysis Limited
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
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
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
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:
Estate: between 100m and 200m in a 400m Dash
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
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 don¡¦t expect us to divulge so much
in a freely accessed article, right? It would not be fair to some of our
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.
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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