The Beijing 2008 Olympics is a giant magnet for real estate investment, but how far-reaching is its pull? Is it a good time to buy real estate in second-tier cities? And could a ballooning worldwide real estate bubble have ramifications for China?
Inquiring minds want to know the answers to all these questions in real estate circles.
Experts may not always answer harmoniously, but unless you have a villa empire, their advice could help you conquer this tricky market more successfully.
No bubble in Beijing or beyond
The Olympic effect will cause real estate prices to rise again very soon, said Sun Fei, chief economist of U.S. GlobaLink Securities Inc. "In 2001, when Beijing won the bid to host the games, real estate prices rose 40 percent almost immediately," he said. Subsequently, with road and transport infrastructure developments in place, and an improvement in the physical and commercial environments, real estate prices continued to rise steadily. This will continue all the way to the Olympic Games, he said.
In real estate markets other than Beijing, here is what five domestic developers are doing…
· Sunshine 100 Co. Ltd. has decided to invest in Liuzhou of Guangxi;
· China Vanke Co. Ltd. is now promoting its Dongli Lake and Crystal City projects in Tianjin, and has paid 600 million yuan for a piece of residential land in Xiamen;
· China Overseas Property has successfully bid for 200,000 sq meters of residential land in Suzhou Industrial Park;
· R&F Properties has acquired vast amounts of land in Xi'an and Chongqing;
· As one of the five major real estate investors that have the full support of the State-owned Assets Supervision and Administration Commission, China Merchant Properties also acquired over 200,000 sq meters of land in Nanjing;
…and here is what two international developers are doing:
· Hang Lung Properties has announced that prior to 2007, it will purchase three to four large plots of land each year in 10 cities outside Shanghai;
· Singapore-based Capitaland has also planned for five to seven projects in Chengdu before 2014.
Analyst Yin Di believes these companies are smart investors. Statistics indicate that the growth rates in the second-tier cities are among the fastest. The best buys would be in mid-size cities surrounding key cities in the coastal areas, he said.
A recent report from DTZ Debenham Tie Leung, a global real estate adviser, suggests that foreign capital is pouring from Beijing and Shanghai into second-tier cities like Chengdu, and Wuhan. Tao Ruhong, researcher and consultant with DTZ Debenham Tie Leung, says that investment funds require his company to compare 20-30 second-tier cities all across China in order to recommend the best city for real estate investment.
Not every market is prospering, however.
On August 22, the Chinese City Development Report revealed that cities such as Shanghai and Hangzhou which saw prices rise dramatically in 2004, have to a large extent seen their gains lost over the last year or so.
Qiu Hong, Managing Director of Beijing Jinchengxin Real Estate Broker Co. Ltd., believes that China is now undergoing a period of inflation after the revival of its real estate market. "Some major cities have already entered the mid-late phase of development and shadows of oversupply are becoming apparent," he said.
Qiu suggests focusing on commercial properties, especially the independent commercial projects such as restaurants, malls, hotels and car parks.
"These projects are limited in number so demand for them will continue to increase," Qiu said. "Because the marketization of commercial projects is higher and the government adopts a more laissez-faire attitude, coupled with the fact that the tertiary industry is growing rapidly, returns in this sector will become increasingly stable. Commercial properties are therefore more popular."
The world and China
On the opposite side of the world, the real estate market is in a very different state.
In the United States, the latest real estate cycle began with a market revival in 1997 and extended to June 2004, with house prices rising at a rate of 20.4 percent per year. However, in the 12 months ending June 2006, the real estate price index managed a mere 8.2 percent growth. At this rate, 2007 may turn out to be the year of falling prices.
Stephen S. Roach, chief economist at Morgan Stanley, predicts that the cooling in the real estate market will be so dramatic that it will shave 2 percent off GDP in the United States over the next year, bringing the U.S. economy to the brink of recession.
Roach warned, "If the real estate bubble bursts, key trading partners of the United States as well as the global economy will find themselves in a dangerous position."
Still, U.S. real estate prices likely will not directly affect real estate prices in China.
Chinese real estate prices are mainly affected by three key factors-government policy, capital and consumer mentality.
By raising interest rates 17 times straight, the Federal Reserve has finally started to weaken the real estate market. In contrast, the People's Bank of China has only intervened three to four times to deal with high real estate prices. There remains, however, much room for adjustment, and the government is steadfastly determined to put the market in its rightful place.
Rising interest rates and measures to increase the deposit reserve rate have failed to cool the overheated economy, and, of late, the state has introduced administrative measures one after another. On September 5, the State Council announced that it would intensify land control measures, issuing eight requirements to authorities in different ministries and provinces. On September 6, three ministries announced a series of measures to adjust real estate trading. These measures focus on six categories of regulation of illegal behavior, including unwillingness to sell properties until the prices increase, as well as housing accumulation.
Under the influence of macroeconomic adjustments, real estate development investments will be down somewhat, but these adjustments cannot be completed in a few seasons or even one to two years. It is estimated that the Chinese real estate industry will soon step into a period of adjustment that will last for between three and five years.
Currently, the major risk in the Chinese real estate market is that many local governments are still not very knowledgeable about real estate risks and their destructive nature. With prices raised sky-high through endless auctions, investors, buyers and financial institutions lack the necessary preventive consciousness to deal with the risks involved in real estate. Once the bubble bursts, the banks and buyers will all face tremendous risk.
The Announcement Concerning the Strengthening of Land Control Policies, promulgated by the State Council, will cause land supply to be tightened further in all cities. And with that, land prices will go up. For real estate companies with land resources, the value of their assets will increase and they will achieve reasonable results.
DISCLAIMER: The information contained herein is based on sources we believe to be reliable, isprovided for informational purposes only, and no representation is made that it is accurate or complete. This briefing should not be construed as legal, tax, investment, financial or other advice, and is not a recommendation, offer or solicitation to buy or sell any securities whatsoever.