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The China Files: Real Estate

The China Files: Real Estate

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Published by Steve Netwriter

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Published by: Steve Netwriter on Oct 16, 2009
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09/25/2010

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STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300www.stratfor.com 
 
THE CHINA FILES:Real Estate
Oct. 13, 2009
This analysis may not be forwarded or republished without express permission from STRATFOR.For permission, please submit a request toPR@stratfor.com. 
 
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©
 
2009 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300www.stratfor.com 
The China Files (SpecialProject): Real Estate
The real estate market in China,particularly the residential side, is aburgeoning bubble that is growing biggerand more breakable by the day. Land andhousing prices were already rising steadilywhen Beijing’s stimulus package hit thesector in early 2009. Now prices aresurging, with developers, bureaucrats andinvestors cashing in while urban Chinese— once encouraged to invest in home ownership by the central government — become less and lessable to buy.
Editor’s Note:
This analysis is part of a series that explores China’s industry, finance, statistics andreal estate.
 On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in thePutuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for theundeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meterof floor space (just in land costs) once the designed residential building is constructed.The purchase created China’s newest “land king,” a term for the real estate developer who pays thehighest price for a piece of real estate during a land auction. And 7.006 billion yuan was the highestprice ever paid for a piece of Chinese realestate for any purpose — residential orcommercial. The milestone is a result of an increasingly intense competition forland in major cities that began early inthe year, when Beijing began distributingstimulus money to various industries —including the real estate sector — tosustain the economy. As a result, landprices have soared throughout China.And with increasing speculativeinvestment in residential real estate, themarket faces a surging bubble that jeopardizes the country’s long-termeconomic development.Since 1998, real estate investment inChina has accounted for more than 10percent of the country’s gross domesticproduct (GDP), compared to only 3percent to 5 percent in the United States.Such investment is also closelyassociated with many other industries,such as construction and finance, and itprovides an abundance of jobs.Therefore, it is seen as a critical pillar of China’s economy and enjoys favorablepolicies from the government and state-
 
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©
 
2009 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300www.stratfor.com 
owned banks (more than 70 percent of real estate investment in China comes from bank loans). At thesame time, real estate developers, local government officials and investors have escalated housingprices across the country by acquiring massive land holdings, limiting the supply and inflating prices,creating a real estate bubble that is not sustainable in the long run.The bubble has grown mainly on the residential side of the market, where there is more demand andhigher profits to be made. However, while fewer developers and investors have been chasingnonresidential projects, Beijing’s 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercialreal estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.
Origins of the Bubble
Since 1978, China’s pace of urbanizationhas increased dramatically, with thenumber of middle-size and large cities(those having nonagricultural populationsof more than 200,000) growing rapidly.Beginning in 1985, economic reformsimplemented in urban areas to makeChina’s planned economy more market-oriented added even more momentum tothe real estate boom, with real estateinvestment increasing by 71 percent by1987. The government’s macroeconomicpolicy of monetary belt-tightening helpedcool this overheated market, which wasfurther tempered by the government’scontinuing to provide housing for stateemployees (
fu li fen fang
, or “welfarehousing”).However, when the state significantly cutback on its welfare housing program in1998, the Chinese perception of personalproperty changed, and this would havean important impact on the real estatesector. The government began thisprivatization process by making a privatedwelling a “commodity” and granting thepurchaser the right to own a newly builthouse for 70 years. (Likewise, the developer who buys the property on which residential or commercialbuildings are to be constructed may own that property for 70 years.) Home ownership in China couldnow be a sound financial investment.Thus, the residential real estate market would boom in almost every urban area in China — andparticularly in the “first-tier” and “second-tier” cities (only Beijing, Shenzhen, Guangzhou andShanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal portsare in the second tier). But rising land prices would eventually put housing prices out of reach for thegeneral public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, whilepersonal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008]to 27,025 yuan [$3,960] per year).

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