Shanghai Real Estate

The Danger of (Real Estate) hoarders

The Danger of (Real Estate) hoarders.

Besides the economic slowdown, the slum in exports, and the likely decline in foreign investments (due to the financial mess in the western world) there is another real threat looming above Shanghai’s (and other top chinese citie’s) Real Estate Market.

It’s the Real Estate Investors that are directly connected to china’s exploding export market of the last decade.
I believe these hoarders are a major reason why real estate prices have taken such a significant fall in Shenzhen and Guangzhou.
During 2008 mroe than 30′000 Factories have shut down in Guangdong province alone, ten’s of thousands of people lost their jobs but as
harsh as it may sound it wasn’t as bad as their bosses becoming tight for cash.

As in Shanghai most Property investors are directly tight to the export business, a large number of them being the actual factory owners.

When those guys business started slowing and cash reserves were getting smaller by the day they had to tap other assets.
They switched into survival mode.

Because you can’t expect to sell your property anytime for a decent price within a day or two the factory owners had to lower prices.
The first couple of them probably got rid of their properties fast, giving them vital cash infusions to keep their businesses running.
But as the world economy’s state kept deteriorating the next wave of cheap price housing was just around the corner.

It’s important to understand that many of these guys have huge amounts of apartments if the numbers of shanghai factory owners are anything to go by.
Here, there is plenty of these guys that invested 100’s of millions of rmb in apartments, taking inventory of the market and in this way ‘inflated’ market prices. 

Our customers alone that fit in this category of investors account for about 20% of the properties we manage.

Assuming these numbers were similar in Shenzhen and Guangzhou it’s easy to see how hey flooded the market with new properties, probably thousands of them.
Competing against themselves for vital cash to keep their factories running they kept slashing prices and putting more places on the market to get the cash they so
desperately needed to survive in this tough market.
Thus creating a deadly downward spiral that’s still going even now.

Worse, as seen in the news many first time buyers have since abandoned down payments they made for “to be finished” property developments in the city, and in this way are creating even more inventory.

I think these folks mainly impacted the Shenzhen and Guangzhou Real Estate Market because of their proximity to the cities. 

Many of the Zhejiang and Jiangsu Factories are still running and making profits, this is why we probably haven’t seen the same declines here yet.
Though some “smaller” landlords have put their property on the market, these sales are mainly related to the stock market, people have lost a lot of cash, also borrowing to buy stocks and now have to tap other resources than their bank accounts to pay back the loans.
This is still a number and hadn’t had a large influence on the market yet.
Everything is still very, very stagnant right now, owners holding on, and buyers waiting out to see what’s coming next.

If, however, the world economy continues to deteriorate, it’s easy to tell that many factories, which are now still holding up are going to be in trouble around shanghai too.
Probably, these bosses too will look for a way to keep their business running until things get better.
Likely, they will sell their property as well, which could be thousands adding to the thousands of properties put on the market by the big developers this year that haven’t sold yet.

Shanghai tends to be a very emotional market, in all industries. If something works everybody’s in it, if it doesn’t all are fleeing in masses thus forming a base for market disasters as we had them so often already.

Is this going to be any different from the 2005 downturn?

That’s a tough one to call.
Because of two reasons.

1.  Prices were still a lot lower than they are right now.
   Sort of giving a softening cushion to many recent buyers.
   Most places have seen a significant increase of about 50% since the low that time.
    
2. The inflated property prices of the time were mainly created by speculators.
   The factory owners, weren’t going to sell, and most of them added a lot to their cost base at the time.
   In one way, these guys are very savvy investors, buying at the low and aren’t panicking.
   So speculators fled the market at the time.
   Many of our colleagues were among them, many of us responsible for this mess.
   I remember finding a cheap place for 500k, and selling it a month later for 800k. Paying back the loan and we were on to the next subject.
   The guy who bought for 800k flipped the property another 2 months later for more than a million.

It’s not hard to see the parallels of the time then and the florida market a year or two ago.

China added many regulations, most of them loan related making it harder for speculators to acquire property.
Also it added the 5 year, 20% (of the profit) and 5% of the whole price rules which definitely put an end to the flipping.

What’s a good thing this time around, the speculators aren’t here anymore.
(They’re all agents now … irony..)

Prices didn’t double every three months for the last three years either.
They steadily increased little by little and I think are more closely demand related than they were back in 2003 to 2005.
And not all factories are going to go bust, if many at all around the eastern provinces that are more closely linked to the Shanghai Real Estate Market.
As in all theories, there is a lot of uncertainty, and I want to emphasize that I’m in general more pessimistic than many of my colleagues.
Only time will tell, but it’s clear that Shanghai’s Property market is going through a tough time right now.

Tuesday, October 7th, 2008, by Oliver and is filed under "General News, Market News, Market Theory ". You can leave a response here, or send a Trackback from your own site.