| Author |
Message |
peterpaul
Barker
Joined: Jan 27, 2004
Posts: 169
Status: Offline
|
 Posted:
May 18, 2006 - 11:15 PM |
 
|
| Post subject: Chinese Property Bubble Now in Bubblicious Flavors |
From the Asia Times on Friday:
Property market headed for deflation
By Laurence Lau
Deeply concerned with the red-hot property market, the State Council, China's cabinet, announced on Wednesday night some new macroeconomic control measures to curb land and housing hoarding and speculation. The new measures include steps to readjust taxation and land supply, and to build more public housing for average-income families.
Whether the new measures will be effective remains to be seen, since the real-estate sector has been a target of Beijing's two-year-old austerity policy, which apparently has been unsuccessful. Hence the risk of a property bubble bursting in China is on the rise, as the housing vacancy rate has been growing remarkably even as prices continued to rise in the first quarter of 2006.
Taking Beijing as an example, housing prices in the capital grew nearly another 15% year-on-year in the first quarter of this year to exceed 7,000 yuan (US$876) per square meter, after a 19.2% increase for the whole of 2005.
The odd thing is that unsold housing space also shot up. In Beijing, the total area of unsold housing floor space rose 22.3% year on year by the end of April to reach 4.43 million square meters, according to government statistics. According to the National Bureau of Statistics, total area of unoccupied housing across the country reached 123 million square maters in the first quarter of this year, up 23.8% from a year ago. This put the vacancy rate up to an estimated 26%, said Yi Xianrong, a researcher with the Institute of Finance under the Chinese Academy of Social Sciences.
What does a 26% vacancy rate mean to property developers? Normally, they will start checking themselves into the hospital once the rate goes higher than 10-12%, and start writing their wills when it exceeds 15%. So we are in very dangerous territory here.
No one doubts that there is immense housing demand in China, and that this will remain true for a long time. What is at issue now is affordability, as housing prices are becoming ridiculously high. Hence only a minority of Chinese residents can afford to buy property, and this small minority is buying up an increasing percentage of the market.
Another big player in China's property market is foreign investors, but the picture there is not any more reassuring. Rents are struggling to maintain their current level, as demand from expatriate postings has begun to dwindle slightly. Rental yields will not be able to keep up at the current rates. In fact, current rental levels are not realistic, because many investors do not see rent yields as necessary since they are only in it for the capital gains - the classic setup for a market-exiting stampede.
When more than 70% of the population in the coastal areas cannot afford property, it is not a good sign. Yet the trouble with bubbles is that they are easier to spot than to prick - to time a correction is exceedingly difficult. Despite the rising vacancy rate, there were still a massive 1.03 billion square meters of housing under construction across China during the first quarter. That figure was up by 23.3% from a year ago. As if that was not enough, in the first quarter of this year, property developers put another 280 billion yuan into construction projects.
Another sign pointing to a possible deflation of the Shanghai property bubble was the surprising rating given the Shanghai Real Estate (SRE) bond issue by the ratings agencies Standard & Poor's and Moody's. SRE is a leading developer in Shanghai's financial hub, and has proposed a US$150 million (HK$1.17 billion) bond issue. It was rated as non-investment, or junk status, as the rating agencies were concerned about the company's narrow focus and limited cash flow. Standard & Poor's assigned a "BB-" long-term corporate credit rating to the seven-year bonds, three notches below investment grade, while Moody's Investors Service assigned a similar "Ba3" rating.
The ratings reflect the key challenges facing SRE, including a lumpy operating cash flow, resulting from its single-business focus on property development. The significant geographic concentration on Shanghai alone did not help either, and the company's rising leverage was a big concern.
In Shanghai, leverage is not just an option: it is a necessary tool to compete. Developers there have to get the biggest projects and complete them the fastest, and try to sell them as quickly as possible. To enable the retail side to buy, many developers have innovative financing schemes to help the buyers/speculators, increasing the dependence on leverage.
SRE announced last month that its 2005 profits surged 234% to HK$301 million (US$38.59 million), from HK$90 million a year earlier. The company plans to use the net proceeds from the proposed bond sale to replenish its land bank, rating agencies said. It has a land bank of 1.4 million square meters in gross floor area in Shanghai, which the company estimates will be sufficient for its developments for the next four to five years.
However, S&P did say that SRE's low-cost land bank, good locations for its properties, and expertise in the industry are offset by its high concentration risk, small-scale operations, and lack of stable, recurring income. After the bond sale, SRE's earnings before income tax (EBIT) will fall to about three times its interest expense in 2007, down from 10 times in 2005 - showing how the firm's interest burden has become dramatically heavier in just two years.
Cases like SRE's are being replicated all across Shanghai. There is not sufficient cushion for even a minor blip.
There has been talk that increasing real-estate investment trust (REIT) involvement in China's property market will maintain its momentum. But even an aggressive REIT boost for commercial properties may not save them, because most of their yields are not sufficiently high to attract REITs; in addition, the bulk of the problem is in residential housing, which is not REIT-able (to coin a phrase).
A bursting bubble is bound to happen, and if you don't want the "bubble gum" on your face, a reduction in exposure is recommended - although staying away from China property when one has already made millions may be very difficult.
In the property market's current state, it will take just one event to trigger the domino effect, and that one event could be anything, from the raising of interest rates, to a small developer absconding, a developer stretching capital too far, or buyers forfeiting their deposits. It will happen, and the best guess is it will be way before the 2008 Summer Olympics, not after.
Laurence Lau has more than 18 years of experience in business and finance. Born in Malaysia, he has worked in Sydney, Singapore, Hong Kong and Kuala Lumpur. He was head of research for two securities firms and a portfolio manager for a UK firm.
(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)
It is nice to see it put so well - I doubt that Beijing can do much of anything (other than bail it out with taxpayer's funds) as the local govs seem to ignore anything against their favor (I seem to recall Shanghai ignoring edicts from Beijing regarding license plate fees a while ago).
Which leaves the real work to be done by the market. Anyone for cherrypicking the beter properties in a couple of years, subdividing them into two units (make 125 m into 2 x 60) and selling it at a 10% premium over their soon (by 2008) to be slashed prices? Get a good crew going and a nice relationship with a bank and their is money to be made on the downside, too... |
|
|
|
|
man
FooJay
Joined: Mar 30, 2006
Posts: 1788
Status: Offline
|
| Posted:
May 19, 2006 - 02:33 AM |
|
|
the small print lost me
but no way to buy here here now or another year at least. but where do u go with capital awash? where in china at least?
this place aint no costa del sol, so y would i pay the same prices? rent is less than mortgage profit times 2, how does the maths add up?
buy-to-let is a death sentence here, plus 30+ years for your forebears.
china is all overpriced , but isnt everywhere?
i would have said small cities a year ago, but even now, cities like changxing r looking at 50% growth a year, (albeit from a low base price). still cheap, but sickening the profits lost right there.
so where in the middle of bumfuk nowhere does 1 invest in property now?
prices in shanghai are similar to spain. that doesnt figger. |
_________________
http://uk.gay.com/ |
|
|
|
|
shanghaiceltic
Board Royalty
Joined: Sep 20, 2005
Posts: 7588
Location: Perth WA
Status: Offline
|
| Posted:
May 19, 2006 - 06:23 AM |
|
|
The property market here is simply well over heated. Locals were buying thinking it would always go up. Now they are beginning to see the reality and some are renaging on their payments. There is negative equity much like in the UK about 10 years ago, but here the gain has to be short term and no one seems to be prepared for a longer wait.
As man said the ratio of earning to prices is way out of kilter. I bought 4 years ago and I am glad I did. I would not buy a new place now. There seems to be no connection with actual value for money here any more. |
_________________
I have parrallel bars at home, one for gin and one for whiskey |
|
|
|
|
|
|
| |
|
|
Forum FAQ
Search
Preferences
Watched Topics
Log in to check your private messages
Log in
