China Real Estate: Boom Not Limited to Just Beijing, Shanghai Magnet Markets

Seeking Alpha ^ | 05/11/2010 | Patrick Chovanec

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There was a good article this week issued by Reuters, and authored by Langi Chiang and David Stanway, on yet another part of China where a booming real estate market is raising serious concerns. Hainan is a tropical island off the country’s southern coast, part of the region I call China’s Back Door, which is being developed as a “fun in the sun” tourist destination. The island has already seen one real estate boom and bust in the early 1990s, and is now a focal point for property speculators all across China.

The reason I mention the article is because it highlights some of the key features of China’s real estate “riddle” that I’ve been noting again and again. First, there is the phenomenon of sold but empty apartments:

Walking along a deserted street in Haikou recently, a prospective buyer, Cao Ying, could hardly believe what had just heard: All the apartments in the surrounding blocks were sold out, even though no one seemed to to live there. Perhaps two apartments in ten were actually occupied, local property agents said. New apartments are to go on the market this month, but they are to be priced at about 15,000 renminbi, or $2,200, per square meter, triple the level of a year ago. That is about $200 per square foot. “That’s outrageous,” Ms. Cao said after getting similar information from three real estate agents, all indifferent to her protests.

Second, the prevalence of cash purchases, the immunity of this source of demand to new government restrictions on mortgage lending:

A survey by CLSA of 60 cities in late March and early April showed that about half of families in second- and third-tier cities had paid for their first or second homes entirely in cash. The proportion was even higher in Haikou. Guo Zhenxi, a local real estate agent, said all his clients paid the full amount in cash, making it easier when they wanted to sell. Cash buyers, or those not borrowing much, will return to the market if prices fall because the new rules do not raise the cost of holding property, once it has been purchased, analysts said.

A New York Times article on Hainan back in late March described the same thing in somewhat more vivid terms:

“People are coming with entire bags full of cash,” said Raymond Hau, general manager of the Sun Valley Golf Resort, which is building the 220 luxury villas. “I’ve seen this myself. A man had a bag and unzipped it. Boom. ‘Here’s the deposit,’ he said. ‘I want two apartments.’”

Third, the Reuters article points out investors’ ironclad belief — despite all the official pronouncements designed to cool the market — that in the end, the Chinese government will prop up property investments:

Ren Zhiqiang, chairman of Huayuan Property . . . said Beijing would turn supportive if the market overreacted. “If property prices drop to the desired level or farther than expected — if there’s a panic fall — the authorities will change policies,” Mr. Ren said in a blog post.

Last but not least, the article reinforces the point I’ve made previously, that what is happening here is not limited to magnet markets like Beijing and Shanghai, as some suggest, but is a much broader phenomenon driven by distortions in China’s economy as a whole.

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Patrick Chovanec is an associate professor at Tsinghua University’s School of Economics and Management in Beijing, China, where he teaches in the school’s International MBA Program.His insights into Chinese business, economics, politics, and culture have been featured in Time, Wall Street Journal, Financial Times, Bloomberg, and many other publications, and on CNN. He frequently appears as a guest commentator on Al Jazeera, Chinese Central Television (CCTV-9), and China Radio International (CRI).

Professor Chovanec has worked for several private equity funds focused on China, and continues to serve as a fund advisor. Prior to that, he served as director of Institutional Investor’s Asia Pacific Institute, based in Hong Kong, and its Global Fixed Income Institute, based in London. Before coming to Asia, Chovanec worked as an aide to political strategist William Kristol and to U.S. House Minority Leader John Boehner. He also served for nine years as an officer in the U.S. Army Reserves.