Archive for Market Theory
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.
Filed under: China Real Estate, Credit, Economy, General News, Market News, Market Theory | China, Opinion, Real Estate, Shanghai|2 Comments
For most of you that know me, I have been in a dilemma for the past few years, running by some amazing opportunities, but always feeling the market has rushed up to much.
I felt like this since about 2008 after the small dip and rebound that came along with the financial crisis.
Now think about how the big party must feel, trying, yet, not being able to reign this big red dragon that is china’s real estate market.
Don’t get me wrong, there is value, it makes a lot of sense to pay a premium especially here in Shanghai, in a city where expatriates, enterpreneurs, and migrate workers are flowing in, settling, and calling it their new home.
Where incomes surge, and fortunes are created and go bust every day (probably every hour), where you can make money in endless ways, and where, sometimes, actually most of the times, location is everything.
I have been here, and fell in love with this business, only because it’s china, and the endless real opportunities i’m presented here everyday.
They’re trying to focus on Shanghai and Beijing, and the investment just flows westward, Xinjiang’s Urumqi is one of those benefiting where some prices have allegedly risen 50% this year already.
It seems like whatever is done, the market has an answer, and Real Estate still seems a safe bet.
A slowdown, yes, but only regionally, with the increases being moved elsewhere by the same people (buyers and sellers alike).
Rising interest rates, and bank limits as well as taxes have shown little effect.
May I suggest something more drastic.
Introduce an alternative, maybe uhm, a bond market?
Filed under: China Real Estate, Market Theory, Me | Crazy, Market Theory, Real Estate China|No Comments
Dear Shanghai and of course, everybody else reading this out there….
…. happy chinese new year!
I’ve had a break, for the first time in years, and really was able to put some thought into the madness of this Real Estate market we all love.
First, upfront, I’m speculating based on my experience and “insight” into the inner workings of this market.
It’s not a numbers game, it’s as I always say here, plain common sense to me.
And this post is a question asked to the future, not a prediction.
So, now, to get at it.
Recently our real estate firm got a lot of new customers that came directly related to the expo, several countries are sending in people just for the expo, and companies do so though.
That for us amounted to about an extra 30 or so clients that are directly involved in the 2010 Shanghai Expo.
Most will stay for a year starting now and are looking for apartments downtown, though some chose Pudong it was mainly downtown.
Realizing that they’re snapping up lot’s of commodity out there and started putting a small squeeze into a previously relaxed market I asked myself what happens after they all leave.
Obviously, it’ll go back to it’s more relaxed state of 2008 and 2009.
But, how many people are here, indirectly involved with the expo?
And how many will stay, or more importantly leave when their employment contract expires after or during the expo year?
I looked back a few cases, and counted, there is an endless number of advertising client-el that arrived in the city because of the 2008 Olympics, a lot of them left, but some stayed.
I wonder how many stayed just because of convinience for the expo being so close a date?
We had a few engineers and IT people too, from firms, not solely working on the olympics or expo, but with a few projects tied to it.
Will the demand for this highly technical skill drop after?
How significant will the drop be if that’s the case?
I don’t know, it would be a prediction.
What I remember from the short downturn during the financial meltdown i the US is that landlords panicked, and competed against each other just 2 months in when the market was in a seasonal low anyway (christmas, western and chinese new year), resulting in some rents being had at 50% of the previous price.
Things quickly picked back up when the demand for rental properties was back to the usual high of march and april.
This year it started early, and it’s at least partially related to the expo.
Remembering the panic price slashing that time I don’t know if it’s a good thing that landlords went by without the yearly dryspell of places staying vacant for a whole month or longer (obviously, there are places like that, but these are deadbeats, bad places that stay vacant in the hottest markets anyway).
I don’t see 1000’s of places being empty after the expo, but it could easily be, that if a lot of people leave because this thing is over people go back to panic price slashing, just the difference would be that this downturn is for good.
Would a slow rental market affect prices of luxury items in the city?
I think a long slow market could do that, I mean, who wants to sit on a place they can’t rent out for the price of their mortgage?
Will investors scoop the bargains like they always did before, or will they recognize that this slow market might hold for a long time and spark a correction?
Thoughts anybody?
And please, don’t take my ramblings to serious! 
Filed under: Developements, Economy, Market Theory, Rumors, Shanghai Real Estate News | Expo 2010, Market Trends, Shanghai Real Estate, Theories|1 Comment
Shanghai Real Estate has been on a real run alongside the stock index this year.
Though volume has slumped prices hold up pretty well and most recently have hit new highs in many commercial centers such as Xujiahui and Xintiandi.
Why the market moves up can be argued with a lot of reasons.
What has struck me about this “real estate rally” is that there is no correlation with the rental prices.
I’ve looked back in our database back to 2005 and have found that in many cases rents actual move opposite directions.
It could be that the two are not as interconnected as previously thought, and it could also mean that the market is healthier now than before, meaning that lower rents and no rents don’t force landlords to sell the property prematurely.
I compared our database and rents were a lot higher in 2005 then they were in 2004, they also went up in 2006 when the sales market stalled.
Yet in 2007 they were virtually the same.
In 2008 rents went down from 2007, mainly because of the panic resulting from the massive failures on wall street (like bear stearns).
Interestingly the stock market came down in a craze too but sales were stronger.
They’re still moving up until today yet rentals have come down from 2008 but are a little bit higher than in the beginning of 2009.
I link more of those to emotions, places don’t stay empty, they get rented out, fast, I would even say quicker than before.
But, Companies have more negotiation leverage, the economy is bad, and they pressuring landlords into lower prices now, and it works, mainly because landlords are letting others worry them.
Filed under: China Real Estate, Market News, Market Theory, Trends | Inter Relation of Rent and Sales, Market Prices and News, Market Statistics, Market Trends, Shanghai Real Estate|No Comments
Alright, alright, I probably could have chosen a better title. thanks for letting me know.
A few days ago a long time customer of SHPlace called me to see if the rules changed again for foreigners loans and the limitations that were put in place when the market was red-hot.
He actually wanted to know whether the new law that was put into place late 08 that only requires 20% downpayment to buy a normal house is now also true for foreigners?
Or if they loosened the restriction of the property. (A normal house is no bigger than 80sqm, 2 bedrooms, and doesn’t cost more than 1.5 million at the time).
I didn’t think they changed that law, but I still had to consult other people.
I called a few of my friends at different companies and bankers to see if anyone heard something.
I was stunned by the responses, because they were all different, and nobody was really sure.
All these new regulations and laws, stimulus packages, taxes that are no more are supposed to give buyers and sellers confidence in the market.
I’d say with the confusion exactly the opposite was achieved.
What could the solution be? A hotline, (well, that one actually exists, but you get handed from one person to another so many times that asking your question to the right person is already a science. For those that want to try, 58881688, if you’re outside of Shanghai Dial 021 first). Oh, and did I forget to mention that each districts has certain new rules that just apply to them too?
Obviously, all new regs are very well thought through, and with the best intentions. The City Government has shown us again and again that they’re up to the task.
The problem here are not the regulations, but the communication of them.
My 2 Cents;
I think a simple site, and one hotline, with one person that knows it all on the other side could take buyer and seller confidence a long way.
Filed under: Market Theory, Rumors, Shanghai Real Estate News, Trends | New Laws, Real Estate, Rumors, Shanghai Market, Theory|No Comments
When property first started getting hot here, most investors came and, well, made amazing fortunes.
After the 2005 downturn, property was still hot, but more of those investors already had quite some capital to go around with, and they knew the boom-days for flipping are over.
I remember talking to some of my Whenzhou Customers, who buying up small properties everywhere, whenever they could, 3 or 4 a month usually, sometimes more.
They weren’t planning on selling the places in the near future, but they bought everything as long as the investment could attain the magical 8% return on capital by renting it out.
Obviously, Today, I think if any of the new apartments can get a 2% RoC they’d be doing pretty good already.
Shanghai’s French Concession is different.
Maybe it’s the trees, the tranquility, the neighbors, the small town feeling, the downtown location, the historical architecture, old treasures and mystery or any of the other things that this area has going for itself.
It’s hot, old houses that anybody but shanghainese, can buy are low on supply but very high in demand.
The same is true in the french concession’s rental market.
Also because most original landlord’s have “different tastes” than western tenants expect in renovation and furniture.
What makes a good place in the french concession?
It’s some outdoor space, a good location, a clean lane, and quietness.
Though not in the plenty, there are properties in the french concession that fit this description and are still attractively priced.
To me these prices are around 25′000 Rmb to 30′000 Rmb.
To illustrate this with some simple examples I take the average of this range which equals 27′500 Rmb per square meter.
And multiply it first by 65 which is about 1′620′000 Rmb.
Now, our ideal 65 square meter 1 Bedroom place in the french concession would be somewhere between jianguo rd and changle road, east of Huashan and west of Changshu Road.
It has high ceilings, and is a ground floor with Garden.
The Garden adds siginificant value, and the high ceilings offer the possibility to add a lot of extra space. (sometimes, part of the garden can also be added).
The Renovation will cost you between 80 and a 100 Thousand Rmb, we’d add radiators, double paned windows, and some humidity control, plus of course, the modern, renovation.
To our experience, if well done, the place will rent between 12 and 15k rmb. Depending on the space added and sqm of the Garden.
This means, RoC will be between 8% and 11%.
Now theory is the smaller the place, the higher the return.
The same calculation with a 100 square meter place that would cost about 2.75 Million Rmb.
Usually these places rent faster, but for less per square meter. Ideal place here has a garden, or terrace, and is a two bedroom.
It will probably rent between 16k and 25k a month.
In this perfect world the least we would get 192000 Rmb a year, or 5.26% RoC.
The median rent would be around 20 thousand a month, 240′000 Rmb per year or a 6.57% RoC. The best case scenario would yield 8.21% a year.
These are a few places that savvy investors picked up, remodeled and rented through us.
This Wuxing Road Place in the picture above has been rented out for 2 years and yields around 7%.
This ground floor garden property set the landlord back about 2 Million and has been rented out for 15k last month, which translates into a RoC of 9% per year.
It isn’t for everyone, countless missteps by other investors have shown the risks.
But a sharp mind, a good eye, a calculator, vision and knowing when to make the move will offer rewards, especially in times like these.
Filed under: Economy, General News, Market Theory, Shanghai Real Estate News, Trends | French Concession, Market Theory, Shanghai Real Estate, Trends|No Comments
If you are an investor looking to buy a property in downtown shanghai to rent out, you may want to look for a place that offers some outdoor space.
If you’re a tenant looking for a place (then don’t forget to visit shplace.com) and you’re looking for large outdoor space downtown you will have to be prepared for fierce competition from other prospects.
To put things into percpective we decided to pull out some data.
I’ve gone through the latest 20 units we rented out since the beginning of september.
To make things more accurate we didn’t include new places, (because they mainly rent on price difference, scale and availability) and focused on 2 bedrooms in the downtown area.
Prices are between 13000 Rmb a month to 23000 Rmb a month.
Apartments without outdoor space where on the market for an average of 5.75 weeks, and places with garden or terrace were rented out after an average of only 1.8 weeks.
That means it takes roughly 3 times longer for a place to be rented out without any outdoor space.
People are also likely to not leave the place they commited to pre-marturely if the unit features some special outdoor space.
All of the 8 renewed leases this year had outdoor space and all three lease-agreements that have been broken by the tenants (i didn’t included breaches related to relocations because that would make this in-accurate) had no or only little outdoor space.
As for price the average apartment with outdoor space rents for about 15% more than places without garden or terrraces.
Filed under: General News, Market News, Market Theory, Shanghai Real Estate News | Market Research, Market Theory, Rental Market, Shanghai Real Estate|No Comments
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.
- 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.
- 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.
Filed under: General News, Market News, Market Theory | China Real Estate, Market News, Market Theories, Shanghai Real Estate|3 Comments
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