Datapoints on the chinese Real Estate Downturn

Read an interesting article today on Business Insider by by Patrick Chovanec on the real estate downturn here in China that’s been coming more and more into the light in recent weeks.

He points out how everything is unraveling lately, and funny his first point is the Sanya, Hainan slump, which I’m not going to argue with, for everybody knowing me, knows that we burned our hands and I’m soon going Suicidal with our SHPlace Hainan Division’s business success (or better non-success).
The first couple of months in 2009 turned out amazing, we started with a small office of 5 people (which quicly grew to about 60)  and we’re able to sell units everyday.
Property buyers made it a habit to bribe agents to get units (from a couple of 100k to 1 million rmb even),
and we in turn had to handover those bribes to the developers sales people when they made their pick who gets to buy this super exclusive piece of real estate.
Crazy enough, everybody bought cash, and no loans, as such was the custom in Sanya.
Then soon after, things started to slow, not at once, but in time.

Now, about 2 years later, it’s dead, nobody buys, people who bought aren’t selling, and developers cut prices like mad.
One of the hottest places we marketed has cut prices by 60% this year, and still, it’s hard to find takers.
One should have seen it coming at prices close to those in Shanghai’s hottest location.

Which brings me to the next point, Chovanec argues that it’s a natural downturn and that because the governments moves where started 2 years ago, they haven’t had a hand in it.
I totally agree it’s a bubble, in fact, I have said this since years ago, only to be always proven wrong (semi-wrong, I still think it’s a bubble) time and time again with new price highs.

Being on the floor (I think it’s the Wall Street Bankers term for it) here, we’ve seen and noticed the restrictions, in the beginning, not much changed, not nearly enough to make an impact.
Buying Restrictions are great in theory, but this is china, people always find a way to cross the river.
Nobody in the business I knew took it really seriously, and the few, first restrictions that were added in the beginning were a literal joke and too easy to overcome.

What makes me say the intervention (if it was intended to be in this scale or not I leave up to others to question) has worked is that they added slowly to the pot until the scale tipped.

From where I stand, what in the past year has really messed things up is the credit market, tightening has gotten worse, and more and more you can’t get a loan for that pad of yours.
And they have been quite busy taking more and more measures, because it isn’t easy to restrain this beast that is the chinese real estate market and it’s lending.
Shit hit the fan when developers have found it more difficult too to get access to credit as well, ( we all knew the game from before, “eine hand waescht die andere” but now banks had no money to lend to developers even if they wanted to).
At first this was offset by private lenders, at some point, at least now, that doesn’t seem to be an option anymore either for most.
And adding to that they can’t unload any of their properties because there are no buyers anymore you find yourself in a cash trap.

See this from a developers eye.

You commited to many more project, because you based your future on the ever going trend, profits and turnover were scandalous.
You buy more land, in many cases with requirements to build on it within a certain time frame to keep you from speculating (irony anyone?)
Now you bought this land financed, with only a little cash up front from  your side, and the rest being lent, by banks, institutions and investors.

You count on completed development sales and in-developments pre-sales to give you the needed cash to mortgage yourself more and start building on this land.
You do worse then expected, but still, enough to at least get that shovel in the ground and lay base hoping for things to get better, well, actually,
you EXPECT it to get better, because this is china.
No way the big boys are going to let that horse who pulls their chariot (the economy and growth) run out of water…

Up until now, it looks like this is exactly what’s happening.
You see that they had enough, you kept going way to fast, and this expensive chariot seems to be so worn down, that if continuing at this speed, there will be a full out crash, and it will be beyond fixing.

You realize they tried to tell, slow the hell down boy, or we will, for the sakes of the people on the chariot, nobody listened and like any good roman would do, they take away your hooves so you’ll be in excrutiating pain to keep you from speeding into neverland.

Chinese Real Estate is not going away, and to me, until the 2012 leadership change, I don’t think anything super drastic can happen.

But slowly, they’re weeding out the over eager horses, the ones that pulled to fast ahead, and we’ll be left with fewer who will pull the chariot at a slower, more sustainable space.

Before that, pain.

There is another interesting point in the article, it’s the obvious reliance on local governments on land sales for their revenue.
According to the Article, Dalian’s revenue is down 50% Nanjing and Wuxi about 30% Wuhan Beijing and Shanghai are lingering around 15% from last year.

I’ve said this many times, this is actually a super big problem, which can be solved though.
I believe the chinese need more choices where they can invest their money.
China needed a Bond Market, not the crap that’s out there right now, but at least it’s slowly getting into place.
Something sophisticated where you can spot the cheaters easier because institutions will do their homework and ask questions for their own protection, not your friends who will turn an eye when you play with the numbers (just a little can’t hurt right?) because it’s in their best interest too.

2 thoughts on “Datapoints on the chinese Real Estate Downturn

  1. Hi Oliver, I’m a canadian-taiwanese watching the SH market and ran across your website. very sarcastic but interesting commentary haha… how would you compare pudong vs puxi?

  2. Hey Emma,
    thanks, I find that sarcasm makes it more bearable.

    Pudong and Puxi are definitely an interesting contrast.

    I was probably the most contra Pudong person ever, I mean it just meant an endless supply of new real estate with planning straight out of a george orwell novel.

    Pudong isn’t what it used to be, and I feel wrong and right with still being negative.

    Puxi has a limited center, and the French Concession, it’s like the upper eastside, but so much larger.
    People tend to choose location over size and comfort for convenience and their social life.
    So I feel that the City Center and the French Concession even though the prices are now sky high are going to weather the next storm just like they have been untouched in the last ones.
    Mainly old houses though, modern high rises are still going to have an aweful lot of headwind going against them, and little to offer.
    Historic Properties are more like collectors items, and people care more about owning the property, they’re more sought after and there is such limited supply that they will always be in demand in my opinion.

    Pudong has Lujiazui, Residential Developements in the area are limited and even though they got recent competition across the river on the Puxi Expo site area, many are still working there, so rents will stay relatively high, and places occupied.
    The Commercial Real Estate is slowly filling up, but with a lot of tricks, and developers give so many incentives that if you would discount it against the rent, they would not nearly get as much yield as they say they do and have on paper.

    Further out is a different scenario.
    People choose it for convenience sakes, but the yields are very low, and supply is high.
    Rentals compete, and so will prices if people start to sell.
    Some Villas demand 100k and up per square meter offering yields below 1% and that’s a pretty safe number since there isn’t any capital appreciation anymore (which was an argument used to justify the low rental yields).

    Different from spaces in Puxi it was also easier to get credit and financing for those properties out there which makes them more leveraged, and fewer landlords are super rich real estate investors and would be more under pressure because of the loan payments should spaces stay empty for longer, interests rise again and the economy turn against them.
    Many pay more back in loan than what they get in rent and that’s just not sustainable in a bad economy.

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