When Mr. Jim Chanos described the China property market as ‘Dubai times 1000’ in 2010 he got a lot of attention; never let facts get in the way of a good trade. He has been proved not just wrong, but spectacularly so. Here we are in 2015, over five years on, and listed developers in aggregate are likely to have a record year both in terms of volume and profits; and this against the background of a sluggish economy. Yaowza!
However there may now really be problems ahead. When the IMF begin to write about oversupply I’m inclined to listen more closely than when an operator is plugging a partisan agenda; especially if the observation chimes with personal experience.
According to Mr. Mali Chivakul (et al) of the IMF there are supply problems, particularly acute in the the smaller Tier III and Tier IV cities (and all over China’s northeast), that are soon going to have an effect. [This link will take you to the paper in full Understanding Residential Real Estate in China]
The paper’s authors highlight an inventory build in 2014 more serious than in previous downturns and in their best case scenario calculate a workout will take until 2020; it could of course take longer.
So, investors should start winching down lifeboats in preparation to abandon ship? I don’t think so. Overbuild may be ugly and represent poor investment decisions but it’s a problem confined to smaller towns. In the larger conurbations there’s arguably still a shortage of quality supply and most recent evidence from Shanghai and Bejing is that prices and volumes are starting to pick up again. Moreover, as most listed developers have consolidated activity in recent years into the bigger cities this will be a problem that ends up taxing the economy for sure but not (directly) investors in the sector.
I mentioned personal observation above. I was in Dali (大理) in Yunnan last week, a small city of ‘only’ 650k souls; and, the new-New Town especially, what a mess! The China property market not then Dubai times 1000; but Dali times 100? Possibly.
Happy Sunday