Some of you may have heard or read about the current state of the real estate market in China, often covered in a sensationalistic way, with talk of “ghost cities” and “bubbles” ready to burst and so forth. These types of reports can cause quite a jolt in the market, which is what we saw happen, probably not coincidentally, after a popular US television newsmagazine aired a somewhat negative report in March. But as I’ve said many times before, there’s often more to a story; important parts can end up on the cutting room floor.
I was in China a few weeks after the aforementioned television report of the country’s “ghost cities” and the supposed real estate bubble ready to burst there, and was surprised to pick up the newspaper with the headline “Property Prices Rising.” The article didn’t mesh with what the Western media was reporting about the situation. So what’s the truth? No question, there are towns (some city-like) with empty buildings for the world to see. And, there certainly have been cases of poor planning and overbuilding. But as my team and I traveled around China, it was clear to us that those represent a small sample of projects and not the country as a whole.
Myths and Realities
One of the reasons there are unoccupied apartments or homes in China is because many Chinese treat investing in property as a means of saving rather than putting money in the bank at low interest rates, or investing in the stock market, which many consider too risky. Property is something they can see and perhaps eventually use for themselves or their children. And given the very high savings rates in China, there are many who are able to pay cash for property investments and sit on empty apartments indefinitely.
More importantly, families across China need and demand affordable housing near work and school centers.
The so-called ghost cities are fairly easy to identify, and Ordos in the Inner Mongolia province is probably the most famous. Ordos has very rich mineral resources and the highest GDP per capita in China. Since the Ordos government became very wealthy on the back of a booming economy, it poured a lot of money into infrastructure and public projects, including a new town 25 kilometers from its old town in a sparsely populated desert area known as the Kangbashi New District.
The New South China Mall in the Guangdong Province is another so-called “ghost city.” It’s located on the outskirts of Dongguan, which once was called the “world’s factory” because of the large number of labor-intensive toy, garment, textile and other industries located there. But as wages rose, the factories started moving inland to smaller cities where wages were lower and workers plentiful. Since migrant workers once accounted for 80% of the population, when they departed, the mall designed with them in mind became useless. In addition, Dongguan lies between Guangzhou, the capital of Guangdong Province on the west, and Shenzhen, another new city on the west, both more popular destinations for shoppers.
In the Tianjin Municipality, Yujiapu is another “ghost city.” Local officials planned to make it a key financial center, the “Manhattan” of China, but with Shanghai, Beijing, Shenzhen and Hong Kong competing, their chances turned out to be slim. The RMB 450 billion in government loans used to launch the project will not be easy to repay.
Those places are the exception, not the rule. We must remember that China has a population of over a billion people, an urban population of about 700 million and 100 cities with over one million people. You just have to walk the streets of its cities, as we have done, to realize that there is a plethora of substandard housing and a need for urban renewal. For the right price and location, there is tremendous demand for housing in China. Apartments for sale in the US$50,000 range are affordable for many Chinese workers. With some 18 million people migrating to the cities each year and with real economic growth of 8% expected in 2013 and 8.2% in 2014,1 we think you could make a case for continued demand in this area.
The government continues to plan for great urbanization and anticipates some 300 million more people will move from the rural areas into cities in the next 10 years. If we assume that each person needs a minimum of 10 square meters of living space, this trend represents a potential demand of more than three billion square meters. Many older buildings also need replacement, so that figure could magnify if even-roomier dwellings are considered.
I have seen how quickly investor sentiment can shift, and I have oftentimes found that when everyone else is panicking about some news headline, potential bargains can be unearthed. China’s new administration is now just getting its game together and I think we’ll see more investment and activity in the right areas. I’m encouraged by the swift reaction—and action—to address investor concerns in this area and remain bullish on China’s long-term potential.
As I said, it’s not all gloom and doom and ghost cities springing up in China. I have more thoughts to share on cities that are thriving from China’s building boom, which I will share in my next post, so stay tuned!
As I mentioned in a previous blog post, there has been a lot of recent media attention focused on the building boom that has been taking place in China, and some observers have jumped to the conclusion that it’s unsustainable. I felt this topic warranted further discussion. We certainly are not seeing 12 to 20 cities the size of New York going up in China, so it’s important to keep things in perspective. It is true that there is a construction boom in China, but that’s mainly because there is a shortage of quality housing and office buildings. It is also true that some projects are big, and not all buildings are occupied all at once. Some buildings are likely to be filled as soon as the occupation permits are obtained. Based on those realities, it’s easy to see that such large developments (“cities”) may be temporarily empty. I wanted to see for myself what exactly was going on, so my team and I embarked on a tour of some new developments in China. Here is my account.
Ghost Towns – or Growth Towns?
We drove to the Yantian District of Shenzhen to visit a very successful property developer. I was amazed to see an impressive modern building that I later learned was designed by the American architect, David Hall. The building is surrounded by a lake and is divided into various sections containing office space and a hotel. It also boasts environmentally friendly features, including solar panels on the roof and adjustable blinds on the window to control the incoming sun’s rays. In the lobby, there was an indicator showing how many kilowatts of power the solar panels produce. We learned that on a sunny day, they could potentially generate 100 kilowatts.
We had a lively discussion with the developer, including the issue of “ghost cities” in China. From their perspective, sales were robust, with particularly brisk business in fully furnished apartments. In 2012, the company presold 13.5 million square meters of property and of that, 12.9 million square meters should be completed in 2013. (They have a conservative policy of recognizing sales only when the project is completed.) So if there is a bubble there, they (and we) didn’t see it. We did see continued demand.
The Space Race
My team and I also recently visited Guangzhou, a city that is fast becoming a concrete jungle amid a building boom. I was amazed at the number of high-rise buildings going up and already completed in the city’s new financial district. My team and I stayed at an ultra-modern hotel with the reception area located on the 22nd floor, giving us a spectacular view of the city. Almost everywhere we turned to admire the view, we’d see buildings sprouting up and towering above the rest, like trees reaching for the sun.
Guangzhou’s new central business district has a well-planned central green strip—a wide swath of land running from its TV tower with its multicolored lights situated on a man-made lake, down to where our hotel stood. The green strip was lined with high-rise office buildings, shopping areas, concert halls and theaters. One particularly striking concert hall looks like a Martian space ship with black and grey walls and windows.
We wondered if all the tall buildings going up in Guangzhou would be occupied and if there was enough of a market for that much space. But in China historically, it seems that if you build it, they will (eventually) come. I remember when farm fields dominated the Pudong area of Shanghai, and we were shown a plan of a proposed city with numerous high rises, parks and other facilities. At that time, we thought it was a pipe dream that could never be fulfilled. Now that dream has become a reality in Pudong. I think a similar fate could be in store for Guangdong’s new office areas; there may be a few growing pains, but eventually, it appears they could become fully occupied.
Of course, when a country has been growing as fast as China has, investors often have little patience. Any missteps or miscalculations can come with painful consequences. As long-time investors in China, my team and I continue to look for opportunities there. And we plan to continue doing our own on-on-the ground reporting, too, to read between the lines and see what’s real.