The LA Times came out Saturday with a widely-noticed article on Beijing real estate, which features my friend Jack Rodman. Jack, who runs a firm called Global Distressed Solutions, is a bad-loan and distressed real-estate expert who has spent the last several years in China, and somehow has the energy to poke around among all the spectacular buildings in Beijing and other cities, worm his way in, and see if behind the beautiful façades there is actually some semblance of economic viability.
Apparently not. According to the article:
By Rodman’s calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn’t include huge projects developed by the government. He says 100 million square feet of office space is vacant — a 14-year supply if it filled up at the same rate as in the best years, 2004 through ’06, when about 7 million square feet a year was leased.
…To its credit, the government recognized in 2007 that the real estate market was headed toward a bubble, economists say. In an attempt to make real estate more affordable, restrictions were introduced on ownership of second homes and on foreign home buyers. But the measures came too late, accelerating the crash of an already weakening market.
The Beijing Municipal Bureau of Statistics reported this month that housing sales in the city dropped 40% last year. Chinese economists have predicted that housing prices will drop 15% to 20% in Beijing this year. Shanghai has experienced a similar decline.
Any conversation about Chinese real estate with Jack is likely to be depressing because his terrible stories aren’t much relieved by vagueness. Unfortunately he probably knows as much about the real estate market as anyone, and his conversation tends to be pretty specific and avoid the kinds of generalizations that we often make here, given the difficulty of getting hard data about some of the problems. When Jack talks about empty buildings he gives actual addresses.
And it’s not just foreign newspapers that are warning about real estate trouble. China’s leading independent business weekly, Caijing, also has an article this week that discusses the real estate mess:
Battered by global financial turmoil, foreign investors are moving quickly to liquidate stakes in Chinese property developers. The market is sinking, and investors are eager for a way out. Real estate developers, including some of the nation’s largest, are fighting to stay afloat. And so far, none have declared bankruptcy.
But key developers who snapped up land and, sometimes in a desperate scurry for cash, signed deals with equity funds and investment banks during China’s property market boom are now slipping toward loan defaults and failure.
Worries about the real estate sector are nothing new, of course. The important issue, for me, is the impact of problems in the real estate sector on the banking system. The LA Times article goes on to explain why:
The situation could get worse. Most of the real estate has been financed by Chinese banks, which have avoided writing down the loans. Eventually, they will be forced to, and that probably will have a ripple effect throughout the economy.
The problem is actually a little messier than that. There have been rumors for over a year that with the forced credit contraction of last year a lot of the riskier real estate developers had to turn to the informal banking sector for loans, and it is not at all clear to me how these get resolved in case of payment difficulties. I am assuming – like, I think, most others – that the government will want to avoid a rapid liquidation of bad loans by the banks. They will not want banks to seize collateral and sell it off for fear that this would cause the market to collapse and would result in the kind of debilitating debt deflation that Irving Fischer described in the 1930s, in which assets are liquidated to meet loan payments, causing asset prices to fall, which puts additional downward pressure on loans, and so on in a self-reinforcing cycle.
Now it is not clear to me that this kind of liquidation is always harmful. A strong argument can be made, and has often been made, that the liquidation process makes a crisis feel worse in the short term, but results in a much faster recovery because at some point very low prices create economic value to businesses of owning the assets, and their use of these assets can fuel a rapid recovery.
The classic case is the massive railroad building program in the US in the 1860s and early 1870s, which left the railroad owners saddled with expensive assets which required passenger and cargo rates that were too high to be useful to most potential passengers. Many of the railroads were never able to stop losing money. When these railroads went bankrupt after the 1873 collapse, and were subsequently liquidated, new owners were able to buy them for pennies on the dollar, and so were able to make them profitable while charging much, much lower freight and passenger rates. These lower rates sparked an economic boom by sharply reducing transportation costs, and the final value to the economy was much greater than the initial losses on the railroad assets.
The worst case, by this thinking, is if assets that are not viable at current prices are effectively taken off the market because the owners are not forced to liquidate, in which case they become a pure deadweight for the economy. The counterargument, of course, is the Fischer argument – that forced liquidation is inherently less stable because it causes a self-reinforcing cycle of price collapses.
I am not able to say which argument is correct, and anyway this sounds as much like a political argument as an economic one, but it is worth considering what might happen in China. The consensus, and I agree with it, is that the government is far more concerned about avoiding short term instability than about promoting long term viability, and so will make every effort to force banks to stretch out the restructuring process, avoid panic liquidations, and take assets off the market.
This policy can work with the formal commercial banks, but what is less clear to me is how the liquidation process will work in the informal banking sector. I am not sure whether pressure can be placed on the informal banks to prevent liquidation without seriously interfering with a wide range of market and governance mechanisms. Certainly rumors about some of the fairly brutal collection mechanisms in parts of the informal banking sector suggest that creditors might not be too eager to confront lenders. Unfortunately I do not have much of a sense of whether this process is already taking place. If any of my China-based readers knows more about this, I would really appreciate some help.
For those who find this topic of great interest, there was a fascinating article in Friday’s South China Morning Post.
With the mainland economy tanking to its slowest growth rate in seven years and banks wary of lending as defaults rise, small business operators are hocking belongings and company assets for loans from pawnshops. “Banks are reluctant to lend,” says Huang Jing, deputy business manager at Shanghai Oriental, the city’s second-biggest pawnshop. “But we have a lower threshold and can provide loans much more quickly and with shorter terms.”
Banned at the start of the Cultural Revolution, pawnshops were considered a form of capitalist exploitation that preyed on poor and desperate people. They were outlawed for two decades, until 1987, but now they do a brisk trade. From gold bullion to houses and factory equipment, customers offer a variety of assets to get loans from pawnbrokers.
Quoting Wang Fuming, chairman of a pawnshop with about $1 billion in loans, two-thirds of which are to small and medium businesses (Chinese pawnshops are huge compared to their Western counterparts and can include hundreds of branches and are actually, funnily enough, among the most efficient parts of the country’s banking system), the article goes on to say:
“About 90 per cent of small businesses in Shanghai fail to get bank loans,” Wang says. “The problem is more severe with a weak economy.” The central government has eased its monetary policy and urged banks to lend, with January lending showing a record rate of growth. Yet most new loans are directed at the country’s 4 trillion yuan economic stimulus plan and state-owned companies.
This quote about the difficulty of small businesses in Shanghai to get loans reminds me of the point, very forcefully made, by MIT’s Yasheng Huang in his excellent new book, Capitalism with Chinese Characteristics, about the difficulty small entrepreneurs have had after the reforms in the 1980s. For Huang Shanghai is Exhibit A in his claim that there has been a reversal away from a market economy to a state-led economy in the past fifteen years. He especially mentions that as the commercial banks turned mainly to funding SOEs, it was the informal banking sector that took on the bulk of the financing for SMEs.
Meanwhile, speaking of funding SOEs, there is a lot of talk in the markets about second big stimulus package aimed at delivering more consumer spending (“A second big stimulus package?” some unkind folk may wonder, “Did I miss the first?”). The front page of today’s People’s Daily has an article with the large headline “Communist Party leadership warns of ‘austere’ year for China.” It goes on to say:
The ruling Communist Party of China (CPC) said Monday the country will launch a comprehensive economic package to tackle an “austere and complicated” year ahead.
“We will increase large-scale government investment, implement and readjust a plan to revive industries, make great efforts to boost innovations, and greatly enhance the level of social security,” said a press release issued after a meeting of the Political Bureau of the CPC Central Committee. The meeting was presided over Hu Jintao, general secretary of the CPC Central Committee.
Meanwhile Xinhua yesterday reported PBoC concerns about deflation:
China‘s central bank on Monday warned of deflation in the near term caused by continuing downward pressure on prices. Commodities prices were low and weak external demand could exacerbate domestic over-capacity, the People’s Bank of China (PBOC) said in an assessment of fourth-quarter monetary policy. “Against the backdrop of shrinking general demand, the power to push up prices is weak and that to drive down prices is strong,” the PBOC said. “There exists a big risk of deflation.”
While assuring us that it would ensure ample liquidity in the banking system and promote the reasonable and stable growth of credit, the PBoC, along with the CBRC, also stated three days ago that it was planning to investigate the lending spike. According to an article in the current Caijing:
A dramatic increase in bank lending in January has attracted attention from investigators with China’s central bank and regulatory agencies, Caijing has learned.
The China Banking Regulatory Commission plans to investigate the huge cash flow after banks issued 1.62 trillion yuan in loans during the month. Notes trading represented 38 percent of the total credit. Some analysts have claimed companies may be using government-encouraged bank loans to invest in the Chinese stock market, which has rallied since the start of the year.
Until today the stock market had continued its upward surge – although the SSE Composite suffered a dizzying 7.5% drop last Tuesday and Wednesday on concerns that the PBoC investigation, if it determines that a primary cause of the recent market surge was bank lending to stock speculators, may pull the rug out from under the market. The overall surge, largely on speculation about which sectors are going to receive bailout packages from the government, has made China the top performer among global stock markets this year, with the SSE Composite rising about 20% year to date.
A lot of my Chinese financial market friends are very worried that small investors are rushing in too quickly and are likely eventually to get hurt, since what is driving the markets – as always – is not changes in fundamentals but rather rumors of government intervention. The game seems to be to guess which sector will receive the next set of rumors about government bailouts and to buy accordingly.
Even if the rumors are true, I think the market is ignoring how difficult it will be for profitability to revive and how even more difficult it will be for asset prices to stabilize. Even real estate companies have seen stock prices benefit from rumors, although the sector is in serious trouble and it is only because they are in such trouble that the government would consider supporting them. Still, this is always how the stock markets work here – it ain’t about fundamentals, its all about government rumors.
At any rate today, the market may have suddenly refocused on how bad the news outside is, falling straight down after its opening, led by commodity producers and insurance companies, with the SSE Composite losing 4.6% to close at 2200.1. If the next couple of days the market remains bad, the government will almost certainly make supportive noises, so I don’t know if this drop is a temporary fall before prices move up again, or if it is the beginning of a longer decline, but either way I think the market rebound has far exceeded any real basis for optimism. It will be much lower in a few weeks or months.
The Chinese real estate market played a mayor part in buying off the many layed off from the SOE in the late 90ies where the danwei gave cheap housing to employees and it was used as compensation for large property development projects i mayor cities. This means that a lot of housing cannot be sold or liquidated by the average Chinese homeowner, so that part does not affect the banks. As for the high-end luxury 20.000 yuan + housing then the demand is non-existing and hard Beijing data you can get from http://bjfdc.bjjs.gov.cn/public/Index.asp check the number on the building project (sina.com has it) against the new project building index and the green not sold apartments will pop up like bad loans at JP Morgan.
The government will and should never allow a rapid fall in general real estate prices as this will destroy any chance of increased consumption in the near future and it will bring more instability to the situation, but they will and should sacrifice the top end housing developers and the banks will take that beating soon enough. As for office buildings there are already changing into half hotels, half apartment buildings too.
Another thing about Chinese housing is that no one seems quite sure what the catch is about the 40, 50, 60 and 70 year lease on the apartments, but from what I can tell then a real estate developer with a 50 or 40 year lease will only sell on a 50 % up front down payment and they say it because of the banks, but I am not sure. This means that as time goes by and you cannot sell your 20.000 yuan+ apartment, then its value may decrease as you get closer to renegotiation the land lease, that´s one bad asset to be sitting on.
Pettis: He especially mentions that as the commercial banks turned mainly to funding SOEs, it was the informal banking sector that took on the bulk of the financing for SMEs.
The big commercial banks never funded SME’s. All of the SME funding was done by rural credit cooperatives, most of whom subsequently went broke, except in the coastal areas where they were supported by FDI.
Huang Yasheng wrote an excellent book, and people really do need to read it, and then read my critique of it on my blog, as I systemically tear it to shreds.
Yasheng’s book is very interesting because I see the data he has and I come up with very different interpretation of it. Yasheng describes a “golden age of Chinese capitalism” that tragically destroyed by state action. I read his story, and I see an unsustainable credit bubble in China in the 1980′s, that popped in 1989 requiring a massive state led cleanup.
It is absolutely true that in the early-1990′s, China moved from the market to a more state-centered system of development, but my argument is that China did that for the same reason that the United States is probably going to move to a more state-centered system of development. The “golden era of capitalism” was unsustainable and just blew up as credit vastly exceeded productivity.
The driving mechanism behind the boom of the 1980′s was recovery from the disastrous Maoist era policies, but that gives you a one time jolt of economic growth and was not sustainable once that jolt passed. If you have credit systems that assume continuation of growth, then this is going to cause a bubble and then a burst.
The really weird thing is that he keeps talking (correctly) about how badly China’s economy has provided public goods like health and education, but then talks about how wonderful India’s is. India has a lot to be proud of but as far as social equity and provision of public goods, it lags behind China, in large part because the state is less active at providing those goods.
As you noted, after Jay Cooke’s firm made too many bets on the future of the Northern Pacific, there was a bank run and a Panic. What allowed the markets to clear quickly was the certainty that the government would NOT corrupt the currency. The United States, as today, needed investment from the rest of the world. Without the assurance that debts would be paid in specie or monetary credit as good as gold, the flows of investment would not have resumed. But, with the certainty provided by the United States’ resumption of full convertibility of paper to gold, James J. Hill was able to combine the bankrupt St. Paul & Pacific with the trackage rights to the Northern Pacific to create the Great Northern whose profit and profit potential were so enormous that that – 20 years later – there was a very different panic over its takeover. The difficulty is that, without a comparable international certainty about the money, neither China’s nor the United States’ markets will clear.
Michael.
Wish I could tell you we were seeing different things in Shanghai, but we have similar issues in that there are a number of city center (inner ring road properties) that are sitting idle…. a few recently clearly plots where things have been drawn down to skeletal crews.
We began seeing signs last spring, as I reported on All Roads, and a couple of recent conversations lead me to believe things will get worse.
to your point of informal lending, there are 2 projects I know of in high profile locations (both hotels) that seem to have run into the old pattern of multiple loan sources covering different floors, and some of the sources were not through traditional banking.
As to how work outs will occur.. I can tell you that the process is long and ugly in many cases (Jack can tell you about that). I worked on Huarong 2 and CCB 1, as well as a couple of private deals and by the time the assets come through the pipeline the quality of the asset is only matched by the quality of the information… 3 buildings were already taken down in the Southern tranche of the CCB auction, and many others were inaccessible for other reasons.
One can only hope that when it comes time to workout these assets, that the process and speed are vastly improved. There are improvements that can be made, and with a number of auctions and private placements to learn from, there is plenty of lessons to draw from.
r
http://www.allroadsleadtochina.com
500 million sq feet built, 100 million vacant.
How far is that from an overall vacancy rate of 20%? In California I believe LA had a vacancy rate over that in the earlyish 90′s. No real problem.
I have seen the Jack Rodman article as well. I don’t know whether to take his word at face value, although the fact that you vouch for him seems to lend him more credibility. But it’s not as if Jack Rodman is the only one working with commercial real estate in Beijing, and it’s not as if the sector is especially mysterious to foreign investors.
Colliers International, as well as numerous other credible sources, regularly track market trends. They showed vacancy in class A office space in Beijing inching up slightly to something in the 15-16% range. (I don’t have the figures in front of me.) That’s not a great number, but it’s also not a devastating number. Similar figures are seen in major cities around the world, at least this year. And considering the major build-out in Beijing over the past 12 months, that vacancy rate doesn’t seem extreme.
Here, I put the time in to find the Colliers report… this one from 2Q2008, but looking back several years:
http://www.colliers.com/Content/Repositories/Base/Markets/China/English/Market_Report/PDFs/The_Knowledge_Report_Office_BJ_2Q2008_r.pdf
Jack Rodman isn’t the only qualified to speak about specific property. Colliers does exactly the same, and I certainly don’t see anything in these numbers to be distressed about.
By the way, about the “second stimulus”… I haven’t been reading the Chinese press regularly over the last month (work commitments), but this article seems to have quite a bit of detail.
http://news.qq.com/a/20090224/000329.htm
It claims central government budget for this year has grown from the initial projection of 280 billion RMB (in November) … to a newly revised 950 billion RMB (to be approved next month). It further claims that the increase of nearly 700 billion RMB will be used “only for increasing domestic consumption”.
Key points:
- all new spending (new from November 2008),
- *central* government spending (not provincial/local),
- all to be used this fiscal year.
When the price dropped low enough, the Chinese government will buy and hold those empty buildings and sell them later. There will not be any ideological backlash in China for the nationalization of building projects.
Excellent piece. One particularly thorny issue in all of this is that most of the high yield debt issued out of China in the last 5 yrs was to the real estate sector. Greentown, Agile, Shimao, Hopson and many, many others all have significant amounts of offshore USD debt. Its going to be a very messy test of the market and what sort of rights offshore creditors have in China. I would not be surprised to see some lobbying out of this. First put dates for some of this debt are in 2010 so the clock is ticking already. I wonder if banks and offshore lenders will be able to run orderly liquidations or will promoters be able to not pay coupons AND keep their company with the backing of crooked courts?
I really can’t get away from Jack Rodman’s bizarre statistics, and would like to see someone try and step up and give us some color on them.
Colliers reports about 1 million sqm of new retail space (“middle to high-end”), and 2 million sqm of class A office space coming online 2006-mid 2008. Jack Rodman, on the other hand, claims 55 million sqm of new commercial real estate over roughly the same period. That’s a 20x difference.
….and from China’s hinterland – in Chongqing – there are furrowed brows a plenty.
Particularly in the residential real estate sector.
How far do prices need to drop before folk buy?
But if you drop ‘em, could there be a revolt ?
One leading developer here, strapped for cash, was warned-off from slashing residential prices by some 30%. The municipal government, I hear, is worried about committed borrowers refusing to pay their mortgages. I understand the word “Shanghai” came up.
The government has a big enough job on its hands trying to “stimulate” the economy. The last thing it needs, politically, is for “aspiring middly- class” confidence to nosedive.
Also – no suprises here – that just like more cosmopolitan China, even the odd HK listed developer has shuttered-up with only the re-bars emerging from the ground. Drawings filed away; everyone sacked; executives hunkered down in prayer.
To what extent is the state of the property sector a greater threat to China than the export manufacturing meltdown ?
Jack Rodman responded to my post on the RGE Monitor site. I am reprinting his response here:
Jack Rodman Says:
Michael, sometimes the newspapers don’t get all their statistics correct. I told the LA Times that from 2006-2009 that all construction activities in Beijing would total about 1 billion sq. ft. equal to 3 times the commercial property market in Manhattan (from an article in Bloomberg Markets March 2006).
From 2007-2009 I indicated that 100 million sq. ft. of commercial office would be completed comprised of 60 million Class A office and 40 million Class B and so-called ’strata-title’ or condominiumized buildings like the SOHO projects. Not all of this space is vacant but there are sure alot of empty buildings everywhere you go from the CBD to Finance Street.
The 65 listed property developers are hemmoraging cash and a Goldman Sachs research report (09/09/08) shows these developers raising capital from two sources: “self-raised but not equity” totalling rmb 478 billion and “other” rmb 724 billion.
I have thought this is the “hot money” that you’ve often written about and of course it is now flowing “out and not in” for the reasons you’ve cited. If so the impact on developers must be devastating. One of the biggest problems is all the PE firms, hedge funds and opportunistic investors who threw money into real estate companies (and other businesses) to capture a pre-IPO stake only to find themselves without an exit strategy when the IPO market collapsed in early 2008.
To make matters worse these investments were structured for speed and tax efficiency and leave the investors with ‘hollowed’ out offshore structures with share pledges, collateral agreements, guarantees and “no IPO put-options” that the developers cannot honor. To add insult to injury the creditors ability to secure their assets or preserve their investments onshore is
“problematic” and the focus of my current business endeavors in China.
Your railroad analogy of repricing and remarketing the assets to stimulate the economy is exactly what happened to all those office buildings in Phoenix, Texas and Colorado during the Savings and Loan crisis. It worked in Japan post Bubble and helped alot in Korea. However I agree with you the thought of doing this in China would be anethema to the government as it would allow the foreigners to make money on distressed assets. Plus it would crystalize the value of the bad loans on bank books.
In summary, I don’t think we’ve seen the last of the China real estate stories.
Property stocks went down Wednesday (25/2/09) as news got around that the industry would not be included in the government stimulus plan. Can it be interpreted to mean the government feels that the situation is not as bad as it seems therefore no stimulus is required for this industry or there are others reasons for the government not taking any action here.
Could it be the case the industry is too massive to put forward any meaningful stimulus plan?
I put together a small analysis about the heavy truck market in China,and the connection with the GDP.
It is quite interesting,because the heavy truck market basicaly tanked in china,if the numbers are right.
http://bomlat.blogspot.com/2009/02/truck-sales-in-china-and-connestion.html
Leaving aside the discussion of the capital position of individual private real estate companies (which I’m not at all informed on… but would not be surprised to find Jack’s description to be accurate)… it seems like he still repeats astronomical numbers which don’t jive with other sources.
“From 2007-2009 I indicated that 100 million sq. ft. of commercial office would be completed comprised of 60 million Class A office and 40 million Class B and so-called ’strata-title’ or condominiumized buildings like the SOHO projects.”
Now he’s getting more specific… but the numbers still don’t work.
Colliers has a table listing specific office projects, and comes up with only 1/30th the amount of class A office space coming along in roughly the same time period. I’d like to see Jack call out the names of exactly which properties he’s looking at that in Beijing that would explain the discrepancy.
I have also heard that Dalian is also massively over built.
By the way, I think it’s unfortunate that the discussion of residential real estate in the LA Times in China didn’t discuss the vastly different conditions in which mortgages are offered, even to first-time home buyers. I’m talking about very strict rules on LTV, and recourse loans (combined with lack of personal bankruptcy).
I personally have a hard time seeing the residential real estate collapsing in the same way that it has collapsed in the United States. There won’t be a surge in supply due to foreclosure, because residential foreclosure simply isn’t going to happen in China to the same degree it’s happening in the United States. Prices may have dropped over the past year due to over-supply and temporary demand destruction, but after developers stop work for a year or two… those who are still around will see prices finding its balance quickly.
CCT: *central* government spending (not provincial/local)
Local governments get their funding from the central government plus business activities such as land sales and local owned enterprises. If real estate prices are collapsing and local enterprises are closing while liabilities like unemployment is increasing, then the only new source of funds is from the central government. Essentially a lot of off book liabilities and off-budget spending are now going to start to be on-book and on-budget.
This is going to be interesting since it’s going to shift the balance of power between the localities and the center for a while.
Supply and demand aside, very little is talked about in terms of price to income/price to rent for the residential market which I believe is quite high compared to most other countries. Similar metrics might be assumed for the commercial market unless someone correcting me on that assumption? What is the “relative” affordability of the real estates in China compared to most of other countries? Thanks always for hosting and writing such an insightful blog.
Jack has a follow up comment to my posting on RGE Monitor in response to CCT’s questions.
Jack Rodman says:
Most of the commercial brokerage firms are exclusive leasing agents for many of the empty or near empty buildings and they only include in their supply figures buildings that have a certificate of occupancy and are currently in the market for leasing. Also the commercial brokers represent international tenants and they exclude from supply what they consider Class B buildings or strata-title buildings. My estimate includes all the buildings that are ‘topped-out’, most have the exterior curtain walls in place and could potentially be complete and open for leasing within 2009. For example China World Phase 3
would be in my figures. Also many completed projects such as Central Point on 2nd E Ring Road and the PICC Tower at Yintai, Glory Center, Office Park in the CBD are virtually complete but for various reasons not currently being marketed. I include these in the supply side.
Its in the best interest of the brokerage community to paint a rosy picture to the building owners they represent. I also agree that not all the 100 million sq. ft. is suitable to international tenants, but regardless, the buildings exist whether they were functionally obsolete when they were built or not. I suggest any skeptics merely drive around the CBD and Finance Street and draw their own conclusions.
Jack/Michael, how representative is the situation in Beijing of the broader real estate market in China? Some on the sell side argue that while the market for higher-end commercial space in Tier 1 cities is clearly bad, it is the worst, and supply-demand is favorable enough in other markets (e.g., affordable residential housing across a broader range of smaller cities served by lesser-known developers) that we should expect that plus increasing affordability, easier credit and government stimulus to lead to a significant growth contribution from real estate/construction this and next year. What do you think?
To me it would seem to come down to demand for credit and the willingness of buyers to draw down savings for down payments and lever up with a mortgage while unemployment is rising. It doesn’t seem like something we should expect any time soon but I’d be grateful for your better-informed perspective. Is there any greater willingness to borrow and spend in China than anywhere else right now?
CCT: Collier’s figure for Class A office building is 1/3 of Jack’s not 1/30. Collier is quoting in square METER and Jack’s quoting in square FEET.
Collier as a broker might have motivation to put rosy picture as Jack says but Jack as a distressed investor might have incentive to put dark outlook to improve his purchasing price. The price has yet to correct to respond to the oversupply situation and Jack’s time is coming.
On a similar matter: It seems there has been massive overbuilding of high-class hotels as well. Apparently, most high-end hotels in Shanghai, and particularly in Pudong, have been running at 10-30 % occupancy for several months now. Talked to a friend in Guangzhou yesterday, and he says that from his apartment he can see several 5-star-hotels. At night, hardly any of their rooms have any lights on.
BCG, I am not an RE expert, but it seems to me that while it may well be true that real estate problems are worse in some cities and better in others, we nonetheless have to be careful at looking at averages. For one thing, most of the building has occurred in the first tier cities, so they represent a bigger share of activity.
More importantly, however, if we are worried about the impact of real estate on employment and on bank NPLs, the question is not what average conditions are, but rather how many worst-case cases there are. To take an extreme case, if in Country A all the building have 15% excess capacity, and in Country B half have zero excess capacity and half of 30% excess capacity, their averages are the same but Country B is potentially in much worse shape.
If a bank lends money to one building that has serious cash flow problems and to another building that is in great shape, the average between the two may look fine but one of the loans will still go non-performing, and no comfort can be derived from the fact that the other building has excess cash. Likewise for employment. If City A is seriously overbuilt and City B is not so seriously overbuilt, we are still likely to see a sharp drop in construction employment in City A without a commensurate increase in City B. I would say that it is either extreme that matters — very overbuilt cities increase unemployment, very underbuilt cities decrease it, and the ones in the middle don’t matter.
Thomas, Beijing has a real problem with 5-star hotels, but that was probably exacerbated by the Olympics. My CD label’s office is in the apartments attached to a new 5-star hotel on Cheng fu lu, and i almost never see guests in the hotel. By the way less than 200 meters away they are building another 5-star hotel.
http://www.pekingduck.org/2009/03/chinas-luxury-mall-calamity/
………Today I visited Beijing’s most stunningly dysfunctional, catastrophic mall, called The Place, and all I could think about was what I wrote back in 2006. Made to look kind of like Versailles on the outside, The Place is an irrational maze of stores and eateries that seems to have been designed to turn off and turn away customers. It has stairways that lead nowhere, unmarked elevators that take you to surprising places, not to mention a generally chintzy feeling created by all the faux marble and Grecian columns; it always looked pompous, but now it’s looking seedy and run-down as well. ………..
china is now on a lot of issues..when will they end..
thanks for the post..china never gets out of the headlines..they always have something to tell the world..
another headliner from china..they always have a lot of news..