"Buying a House is Patriotism!"
Notes taken from the Real Estate panel of the Beijing Wharton Global Alumni Forum on June 13 2009. Talks in Chinese and English; translations are my own. CRE = commercial real estate, RRE = residential.
- Panel Attendees:
- Prof Grace Bucchianeri, A/P RE, Wharton
- Ronnie Chan, Chairman Hang Lung Group Ltd
- Feng Lun, Chairman Beijing Vantone RE Co. Ltd
- Li Sze Lim, Chairman R&F Properties
- Po Sum Wu, Chairman Central China RE Ltd
- Xin Zhou, Chairman and CEO, E-House China Holdings Ltd
- Observations:
- There are no campers as happy as Chinese real estate developers. With an implicit floor (and ceiling) on their businesses, these titans run high growth but stable businesses. This shows in my experience working in the accrediation team and on class project teams with MBAs at the Guanghua Business School. Usually “good” business schools are judged to be “international”, to incorporate case studies from around the world and to attract international students. The Chinese students wanted none of that. They wanted to know things specific to China, to meet people, Chinese people, who would help their careers later in life, and though they acknowledged the merits of Western education (Wharton is revered) it is out of the question as to whether they would like to spend their careers in China or abroad. This despite the large disparity in income, which of course in an undervalued currency region means nothing unless you compare purchasing powers.
- Beijing and Shanghai still cheap compared to international top 10 important cities.
- Much room for profit in between.
- Chinese regulations prevent leverage and inhibit mortgage lending
- Chinese spending habits – market methods in nonmarket internal systems. The real estate market is bigger than in official statistics.
- Dichotomies: coastal vs inland is out. Now we think about city vs rural
- Demand is tremendous.
- People say that 80% already own houses
- but in reality its all substandard stuff.
- In singapore they have 85% ownership but everyone wants the 15% -> upward price appreciation
- Lots of room for RRE
- In Henan, 38% ownership – target to go up to 50%. Annually, 1m farmers moving to urban areas. Every year, 40m increase in urban population.
- Chinese GDP per cap is 13-15k – still a long way to go
- CRE doesnt just mean high rise offices – real estate is also connected to consumer spending – Retail malls. Still extremely successful
- 80% of RRE are first time buys, for their own stays. There is a lot of pent-up demand. This is opposed to US flipping demand.
- Foreign investment is not liquid – stuck in China for min. 5 years
- Chinese RE company Hang Lung Group: Price/Earnings of 1, 45% ROA.
- Liquidity Crisis saved China
- America’s effect on China is limited. External investment wasn’t much anyway. And crisis deflated commodity prices.
- China RE is a govt influenced market economy.
- but an economic problem is still viewed as a social problem and thus a govt problem.
- The govt is wary of a bubble
- So there is a maximum price upside to RRE – the only thing to do to max profit is to go for quantity
- but govt also acts when the market is not doing well – implicit floor
- In response to audience question about Taiwan RE market: “Where is Taiwan?” Same for HK. Mainland China is the future. Real estate price is very cheap. HK is history.
- “Xin ju” concept – relatives save up for couple and give house as wedding present – no need for mortgage – it is a sign of family strength that you have to buy a house.
- Shenzhen – tier 1 city, one of the richest – on parity with Hongkong. People used to go from Hongkong to Shenzhen to buy fake LV, now its the other way around. Residential prices breaching 1m usd.
- Shenzhen is a special city. Its an “immigrant city”, with high competition, high tech, and huge tax incentives with a fantastically big market.
- GDP is going down in coastal trade cities like shanghai BJ and guangdong, with the middle and west of China growing.
- In the long term, the crisis will be beneficial for China
