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At a time when investors like James Chanos, CEO of New York City-based Kynikos Associates, is short China and China real estate because of his belief that, “China has been relying on a property bubble to spur its GDP growth,” savvy real estate investors are pouring money into China’s property market. Why the disconnect?
There are two reasons: 1) China’s curbs on real estate lending are leaving local developers short of cash, creating unprecedented opportunities for foreign investors to participate in China’s real estate development; and 2) fundamental, underlying demand for housing in China’s third- and fourth-tier cities is creating opportunities in cities whose names are unheard of to all but the most experienced China hands.
As to the first, there is no question that China’s measures to tighten its realty market is putting a squeeze on local developers. Concern that the Chinese economy may be overheating led the People’s Bank of China to raise interest rates five times and the reserve-requirement ratio 12 times since the beginning of 2010 to tame inflation. Some cities have imposed property taxes, down payments have been increased, and more second- and third-tier cities have announced measures to dampen housing prices. As a result, the outlook for mainland developers was cut to “negative” from “stable” by Standard & Poor’s in June, and the ratings agency said that tighter credit and further government curbs may lead to rating downgrades in the coming year.
This has not gone unnoticed by Hong Kong developers, who are among the most cash-rich in the world and who are poised to snap up land in China at a time when the finances of their mainland rivals are being sapped by government property curbs. For example, Swire Pacific Ltd. recently sold a mall in Hong Kong for $2.4 billion, yielding funds that analysts say will be deployed on the mainland. And Hang Lung Properties Ltd., another large Hong Kong-based developer, has built up Chinese currency holdings of 20 billion yuan ($3.1 billion) that it says will be used for its projects in China.
“Hong Kong developers should have an advantage in acquiring land while their Chinese counterparts are less aggressive,” said Jack Ye, a Shanghai-based director of investment at property broker Cushman & Wakefield Inc. “Chinese developers have turned cautious on land purchases as the government measures tightened their liquidity.” Meanwhile, average home prices rose 0.2 percent in China in July from the previous month, with prices increasing in 66 out of the 100 cities surveyed by SouFun Holding Ltd.
The second reason why foreign real estate investors are flocking to China is the continued development of China’s third- and fourth-tier cities. According to CBRE Research China, about 45 percent of real estate investment deals in China in the first half of 2011 were made by overseas institutional investors, much of that in China’s smaller cities.
For example, Deutsche Bank is planning to finance a large-scale property project in Tieling, a small city in northeastern China’s Liaoning province where Henderson Land Development Co. Ltd. paid 807 million yuan ($124 million) for two land parcels in 2009, and is expected to invest a total of 3.3 billion yuan ($512 million) by the time its project is completed.
“It is not surprising for foreign institutional investors to tap China’s lower-tier cities, because the demand there remains strong as a result of a lower urbanization rate, and the local governments are more willing to cooperate with them,” said Carlby Xie, head of research and consulting for North China at Colliers International.
The city of Santai, where I did a joint venture in 1996, is a case in point. Santai is a county level city under the jurisdiction of Minyiang, the second largest prefecture-level city of Sichuan province in southwestern China. Of Santai’s total population of 1.5 million people, only about 250,000 live in the center city, while the remaining 1,250,000 of its population live in the surrounding countryside.
Due to increasing economic activity and the desire of its citizens relocate, the local government expects the population of its center city to double to 500,000 by the end of 2015. As a result, it has commissioned a major redevelopment of “Old Santai” to provide modern apartments and commercial activities for its burgeoning city population. Having known the Santai government for over 15 years, I can attest to the fact that they would welcome foreign investment and would treat foreign investors well.
Santai is but one example of the urbanization that is taking place all over China. As I often tell foreign audiences, China is not just Beijing, Shanghai and a handful of major international cities. As a result, it is a mistake to look at the property markets in those major population centers and draw general conclusions about the country as a whole. More and more companies and investors are coming to recognize that hundreds of cities in China like Santai represent the best opportunities for investment in the coming years.
