China: a long term buy

The Luxury Expert explains why the Chinese real estate market will remain strong in the long run.

There are new major world players in the real estate market and this, especially, includes the Mainland Chinese (I refer to PRC citizens as Chinese). This is only the beginning of their reign at the top of the real estate world market, and this wave will be as significant and probably more long lasting than the Japanese wave of buying the world’s top properties – from iconic Manhattan skyscrapers in United States to beach properties on Australia’s Gold Coast in Australia – which peaked in the late 1980s.

It is very advisable and beneficial to learn at this early stage, the significance and characteristics of this ‘China wave’ and what it means for investors, specifically in our region.

The Chinese government is trying to curb its domestic real estate sector from overheating by introducing measures for better sales transparency, acting on buyer’s side to reduce mortgages, and discouraging purchases in excess of one property.

The Ministry of Housing and Urban Rural Development announced five rules to improve transparency and to prevent developers from intentionally delaying launches. These measures include; requirements for developers to guarantee the quality of the building on delivery at pre-sale stage, projects without pre-sale permit are not allowed to collect any form of cash deposit from buyers, and local governments are required to establish a way to monitor implementation.

When I visited Hong Kong in late April I spoke with a couple of major developers of high end properties in China. and they were not worried about the measures. Why?

Well, simply put, the Chinese have had their fingers burnt in the financial and stock markets and have lost their trust in such ‘westernised tools of investment. While an entire investment can be reduced to zero in stock markets, such a calamity is unlikely to happen in real estate, and the Chinese citizens are betting it is not going to stop anytime soon.

My take is that there is going to be just a temporary slow-down in the Chinese real estate market; a visible slow-down in the short-term that might last no more than a few quarters, with a major upward spike in activity at a later stage. Asians love their property and the proportion of property investment is significantly higher in Asia than the West.

How about the property bubble? I believe it is less speculative than most analysts suspect, because there are many in Asia who are climbing the socio-economic ladder and will be buying properties as soon as they reach the capability to do so. Thus, the demographics remain favourable – urbanisation is in full swing and will be fueling the real estate market for many years to come. Furthermore, the PRC Government cannot cool the market excessively as it must maintain a minimum annual growth rate of 8 per cent. This will ensure enough jobs are created and maintain social stability.

Also, further RMB appreciation will happen in due course. The government may adjust it, or it could be due to the depreciation of the Euro and possibly other western currencies, which is already happening this moment.

There is talk of speculation, but in reality most Chinese purchase with a long term view and tend to hold on to their property. That means that Chinese will further strengthen their buying power and, given the cooling activity in China. it only means one thing: a spill-over. Stronger RMB will chase assets out of China.

My prediction is that the major beneficiary in the region will be Hong Kong with further spillover to Singapore. If there are no major financial disasters resulting from European Union members’ defaults, prices in these countries will increase further, and especially so in the luxury market.

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About the Author:
Alex Shlaen is an economist and holds an executive MBA from Kellogg School of Management and HKUST. He is the founder of Panache Management Pte Ltd and represents ultra luxury branded products, furnishings and interiors by Tonino Lamborghini and Formitalia in South East Asia. He is a serial real estate investor. www.panachemanage.com