The Chinese house of cards by Joshua Lee

As the world’s second-largest economy is currently experiencing its slowest growth in 28 years, there are fresh concerns over the recent underperformance of Chinese real estate markets, with analysts anticipating further deterioration unaided by a tougher lending environment and international trade tensions. Real estate accounts for approximately 25 per cent of China’s GDP and is a bellwether for global economic activity, a crisis in China’s housing market would certainly be of considerable global concern.

The Chinese housing bubble looks increasingly unsustainable. Entire cities have been erected, and many remain vacant. It is estimated that roughly 50 million apartments of China’s urban housing stock sit vacant too. Furthermore it is estimated that 61 per cent of Chinese urban households live in housing which is less than 10 years old. Simple logic shows that the continuous building of new homes to ‘stimulate investment’, coupled with the outpacing of household disposable income creates a delicate situation for Chinese policy makers.

Oddly enough, Chinese middle-class buyers have shown little concern over their domestic real estate market, and are just as optimistic as ever to buy. It is reported that 69 per cent of home buyers in 2018 purchased their second or third home. However, what would happen if the Chinese middle-class lose confidence in real estate investment? Perhaps more relevantly, what would happen when all of the Government measures to stabilise the property market have been laid on the table and China simply runs out of middle-class buyers? All these seem to lead to the unavoidable conclusion that a significant amount of risk has not yet been priced into Chinese equities and debt assets.

Conversely, renewed activity in commercial real estate (CRE) by foreign investors saw an upturn which peaked at a record RMB463 billion (£52.6 billion) in 2018, although growth compared to the previous year slowed to 9.5 per cent. Tier-one cities such as Shanghai, Beijing, Guangzhou and Shenzhen were the preferential targets for foreign capital last year, accounting for 45 per cent of investment in CRE in China’s largest cities, up from 25 per cent of total investment in 2017. International players are expected to continue to take advantage of tighter liquidity in China’s property market in 2019 as they aim to execute strategic goals of raising exposure in one of the world’s biggest economies. Given the scarcity of prime state-owned land in China’s biggest cities, these foreign-involved deals which seem expensive now, will be considered bargains in the years to come.

Analysts remain bullish on China in the long-term because of its strategic plans to lift hundreds of millions of citizens into the middle class. However, this is dependent on an ever-increasing GDP which is intrinsically linked with real estate. For now, a reasonable investor might simply have to play their cards right and adopt a passive ‘wait-and-see’ approach.

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