|
Mainland money to the rescue
At a time when the property market at home is rallying, the Chinese government is investing in distressed London property. Alex Frew McMillan reports
‘‘The People’s Republic of China lights the fireworks that mark the 60th anniversary of its founding on October 1 at a fascinating time for its real estate industry’’
At the end of August, institutional investors struck a real estate deal that is a sign of the times. A consortium led by the sovereign wealth funds of China and Qatar bailed out the main owner of the Canary Wharf office and residential development in London, Songbird Estates. Songbird was flailing under £880 million in debt owed to the American bank Citigroup.
Qatar Holding plans to increase its stake in Songbird to almost 30 percent, making it the biggest shareholder in the company, which in turn owns more than half the buildings in Canary Wharf. The China Investment Corp. (CIC), which wasn’t previously involved in the London project, is buying a holding of as much as 20 percent.
The deal, due to wrap up by October, marks the first big investment in Britain for the CIC, and it shows just how different the financial climate is in Asia compared with the West. It also helps explain why the picture of the property market in mainland China is so different to that of Britain or the United States. Thanks to swift action by the mainland government, and the addition of plenty of cash into the economy, China’s property market has rallied strongly from its low point last year. All of a sudden, the question is whether another “asset bubble” is forming in Chinese real estate, rather than whether the mainland government can turn its economy around.
The People’s Republic of China lights the fireworks that mark the 60th anniversary of its founding on October 1 at a fascinating time for its real estate industry. Market watchers such as Jane Murray, the head of research for the Asia Pacific region at Jones Lang LaSalle (JLL), note that the central government has set a target of 8 percent growth for the year, and is likely to achieve that.
As the Canary Wharf deal shows, the Chinese government has the money to make it happen. It has already pumped 4 trillion yuan in fiscal stimulus into the economy, and it turns bank credit on (and off) when it wants, based on the economic picture. With the financial crisis to fend off, China’s banks were permitted to make new loans of 7.37 trillion yuan in the first half of the year, more than triple the level of lending at the same time last year.
China bulls say that if the government wants 8 percent growth, it will get it. Maybe the global economic crisis is indeed making China rely more on its own internal growth than exports to the West. Naysayers question the quality of economic figures coming out of China – many economists look at statistics such as electricity usage because they believe the official stats are “massaged” way too much – or point to the possibility of another bubble forming, likely leading to a “pop” and another large correction.
“In Asia Pacific, forceful policy intervention has led to improved business and consumer confidence,” Murray wrote in JLL’s second quarter research report. “Fuelled by lower interest rates and major liquidity injections by central banks, equity prices and various residential markets have rebounded from their recent troughs, but the question remains as to whether this turnaround can be sustained over the rest of the year and beyond.”
JLL expects that it can be in China. It forecasts gross domestic product growth of 8.0 percent for 2009, and 10.1 percent for 2010, citing figures from Global Insight. That compares with a 2.9 percent decline in Hong Kong for 2009 and growth of 3.1 percent in 2010. The worldwide average is an economic decline of 2.4 percent this year, switching to growth of 2.3 percent next year, with China and India the strongest performers in this part of the globe.
The recent volatility in Chinese real estate prices and sales volumes is a reminder of the market’s immaturity. But many buyers are putting money into property. “In spite of falling rents, many wealthy Chinese buyers believe the bottom of the market has passed and now is the right time to make a long-term investment,” Michael Klibaner, the head of research for JLL in Shanghai, said in a recent report on the luxury residential market.
According to the Beijing Statistics Bureau, high-end villas and apartments in the capital saw a surge in sales in the second quarter, with volume up 98.1 percent compared with the same time last year, or almost double. Landlords are still seeing rents fall, but most cities in China are seeing a strong growth in demand from buyers and investors.
Residential sales are also looking stronger in Guangzhou, according to the brokerage Knight Frank, with average prices of US$4,297 (HK$33,305) per square metre in Beijing and US$3,121 in Guangzhou. Shanghai’s prospects are less bullish but prices have steadied at US$3,807 per square metre. Vacancy rates remain high in these cities – at 24.5 percent in Beijing, 18.0 percent in Guangzhou and 22 percent in Shanghai – indicating that residential real estate is still “green” on the mainland.
By comparison, the mature market of Hong Kong has an average vacancy rate of just 8.8 percent, with many more homeowners living in their apartments rather than owning them for investment or speculation. Of course, Hong Kong’s property prices are much higher – Knight Frank put them at an average of US$20,107 per square metre for luxury apartments of more than 100 square metres.
The massive stimulus package in China has had a big effect, flowing into the banking system, where lending has been freed up. Chinese banks issued 7.37 trillion yuan in new loans in the first half of 2009, the equivalent of around one-quarter of the country’s gross domestic product. With a lot of fresh backing for mortgages, the total value of property sales in China leaped 60 percent in the first seven months of this year, according to the Beijing Statistics Bureau. Real estate investment was up 11.6 percent for the first half of 2009.
Each set of monthly loan data is scoured for signs of the direction that the government and the central bank want to go with their lending policy. Are they continuing to pour in cash? Are they turning off the tap?
Some observers say these figures are getting too much attention. “China’s monthly new loans data steals the spotlight of other equally important data points,” Merrill Lynch wrote in an August report. “We think investors should downplay this new loans number in the second half of 2009 to pay less attention to the various versions of rumours.”
The basic point, Merrill’s economists Ting Lu and T.J. Bond say, is that China’s economic recovery appears to be solid. They don’t expect China to “tip the balance towards policy tightening until spring 2010”, although it may tinker around with policy to avoid asset prices in real estate and stocks getting ahead of themselves.
On an individual level, property experts say buyers in China have to be very careful. There has been little in the way of a secondary property market, with most buyers keen to snap up new apartments, meaning investors and speculators may not be able to offload their purchases. Speculation is also rampant, and construction standards are often poor, even at supposedly “luxury” developments.
The development of China’s property market is hampered by a lack of reliable data. According to the 2008 JLL Real Estate Transparency Index, the Tier 1 markets of Beijing and Shanghai are “semi-transparent”, falling in the third tier alongside places such as the Philippines, Argentina and India. China’s Tier 2 cities fare even worse, with low transparency, the second-worst classification, alongside places such as Pakistan, Kazakhstan and Vietnam.
The situation is improving, with China showing one of the biggest upgrades over the previous report, alongside India and Vietnam. “The most noteworthy change is that China has moved into the semi-transparent tier and is now considered more transparent than India,” JLL notes in the report. “However, the two emerging economic giants of the region remain very close in terms of overall real estate transparency.”
Click here for more on home decorating
|
