Back in 2007 a UK television documentary fronted by quick-witted comic Paul Merton, made the rather astute observation — for the time — that Chinese residential real-estate investors tended to keep their properties unoccupied. In other words, they never rented them — on purpose.
According to Merton that was because the Chinese liked to keep property investments shiny and new “for show”. He added there were also costs in kitting them out for tenants because the practice in China was to sell properties as empty shells — no amenities included.
He drew attention to a somewhat kooky Chinese development called ‘Thames Town’, a new-build settlement about 30 km from central Shanghai modelled on the novelty concept (ahem) of a traditional English market town. This, he reported, laid mostly empty. It was a backdrop for Chinese wedding pictures more than anything resembling an inhabited community. And apparently not much has changed on the empty front since then, as per this blog.
Hugh Hendry of Eclectica Asset Management, meanwhile, made a fact-finding trip of his own — post crisis. This time, he observed the now unprecedented glut of commercial real estate sitting empty in the country’s business metropoli. You can view his video diary on the subject on Youtube.
More recently in July, Michael Pettis, a professor at Peking University’s Guanghua School of Management, posted equally glaring observations on the empty-property scenario on RGE Monitor — this time from fund manager Stephan van der Mersch. Those went something like this (our emphasis):
I don’t know how much you travel around China. Tom and I do a fair bit, and most recently we were in Guiyang. I thought I’d seen insane excess in the past — 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc. But what we saw over there is rather hard to fathom. It seems the Guiyang city mayor had the same idea as the Shenzhen mayor — to move the old downtown to a piece of undeveloped land.
Our anlayst’s view is that “As long as the government provides the liquidity, it will support the market.” Why do Chinese like real estate so much? My view is there is an unusual cultural affinity for real estate ownership in China. Aside from that however, if your interest rate on your savings account is 2% or less, then real estate can look pretty attractive in comparison. That’s why you end up with so many sold and unoccupied units on the outskirts of cities in China. The “Well, we might as well buy an apartment instead of leaving it in the bank” thought process is probably pretty common in China.
So keeping interest rates low enforces the property market in two ways: by making mortgages cheap, and by increasing the incentive for households to move their savings into real estate. Considering how many unoccupied units we see in China, it’s certainly remarkable that the secondary residential property market is as miniscule as it is. This all tells us that Chinese homeowners’ holding power is extraordinarily high. So in shorting Chinese real estate we’re competing against 1) the buyers drying up and 2) Chinese holding power staying strong. That’s kind of an ugly thing to bet against. The fundamentals could stay insane for quite a while longer? What makes the buyers dry up?
Which brings us to Wednesday’s Chinese real estate market news. First, the following from the Beijing Real Estate Transaction Management Website, which notes, via Caijing Magazine:
High prices dampened property sales in first-tier cities in September, despite the month being a traditionally busy season, analysts said.
And from property consultants Centaline China, also via Caijing:
In Shanghai, sales in the second week of September fell 10 percent week-on-week, while supply rose 84 percent, according to property consultants Centaline China. In Guangzhou, sales dropped 30 percent in the second week of September, while supply grew by 73 percent, Centaline said.
The consultancy said in a research report published on Sept. 23 that soaring prices depressed demand, most of which was met by strong sales in the first eight months. The lukewarm sales performance in top cities and increased supply in September will add to the inventory on the market, the report said. Gao Shan, an analyst at Beijing Yahao Real Estate Services, told Caijing on Sept. 23 that developers will introduce more properties to the market in September and October in a bid to tap into the usually busy buying season. Sales in October will be a barometer for the market, he said.
We think that means the next few months could really make it-or-break it for some of China’s real-estate investor legions.
Related links:
China’s land boom, a datapoint – FT ALphaville
China’s looming credit crisis - FT Alphaville
China: Too much of a good thing? - FT Alphaville