In the Hutong
Waiting for guests
The question of whether China’s real estate market is overvalued or not is a recurring theme in the regions business media. The most recent example is an article in MarketWatch by Chris Oliver, which quotes Forensic Asia managing director Gillem Tulloch as saying “the bubble will likely burst sometime in the next year.”
You can debate Mr. Tulloch’s prognostications, as well as of his wisdom in using dark windows and Google Earth as evidentiary sources to support his thesis. My problem with the entire debate is that most analysts, foreigners in particular, lump all Chinese property into a single amorphous mass when analyzing value.
This is not a mistake an analyst would make in other real estate markets of the size, and for good reason. When not accompanied by major economic crises, real estate markets are naturally cyclical. In each of these cycles, some properties, by dint of either size, price, or location, tend to fall faster when drops occur, and rise more slowly when recoveries begin. Prices of condominiums and homes in less desirable neighborhoods, for example, fall faster and further – and recover more slowly – than single-family homes in more exclusive locations.
While 15 years ago the case could be made but there was not much differentiation among Chinese properties, that is no longer the case. Even a casual jaunt though China’s largest cities reveals vast differences among both residential and commercial properties. The variances of design, construction quality, and management among new apartment developments in Beijing or Shanghai that would surpass even the gap between a Harlem walk-up and a Park Avenue penthouse.
In addition, a clear dividing line must be drawn between commercial and residential real estate. Even in China, these markets move to different rhythms, often to the frustration of developers and managers of large, multiuse properties. And, as my friend Bill Bishop would happily point out, to compare the dynamics of the real estate markets in Beijing and a third-tier city in Gansu is a specious exercise: by definition properties in those cities appeal to buyers in vastly different circumstances.
It would be useful, as the debate around when and how far Chinese real estate prices will fall proceeds, for all of us to begin to divide Chinese real estate into types and classes better suited for analysis. While this may still not adequately explain the disconnect between rental rates and property prices, it will take us a long step closer to understanding how and why this market behaves as it does.
Update: A superb entry by Ranjit Lall in the FT’s “beyond brics” blog explains why the Chinese Property Bubble meme may well be a myth.