The 'China Dream' and the property Market
Comment of the Day

September 06 2013

Commentary by Eoin Treacy

The 'China Dream' and the property Market

Thanks to a subscriber for this report from Deutsche Bank offering a bullish perspective on the Chinese property market. The full report is posted in the Subscriber's Area but here is a section
Urbanisation to increase residential demand by 10m units annually
Given assumed urbanisation rates and a target of 50% urban population coverage for commodity residential housing in 2030, we forecast an average annual demand of approximately 1,015msm (580msm first-time homes and 435msm first-time upgrade homes) in new commodity residential apartments through to 2030. This is equivalent to about 10m units p.a. (6.4m first-time homes and 3.6m first-time upgrade homes). These estimates suggest end-user property sales volume could increase a further 14% from 2012 levels (890msm) over the next 15-20 years, and also implies end-user property completion needs to pick up by 60% from 2012 levels (630msm). In addition, we estimate approximately 6m new social housing units p.a., will be needed through to 2030. These estimates represent substantial upside potential for developers, especially developing end-user properties.

Strong income growth could support significant increases in property prices
As China becomes a ‘high-income country', we expect a corresponding growth in disposable incomes, which will support further increases in property prices. If monthly disposable incomes grow by 7% p.a. to 2030 (in line with GNI per capita), coupled with a debt-servicing ratio of 40%, we estimate property prices could rise by 216% in 2030 from current levels. Furthermore, we note that the positive impact from interest-rate liberalisation, which should lead to lower interest rates, could be further supportive to affordability and could underpin growth in property prices by 258% from current levels by 2030.

Eoin Treacy's view Property is an emotive subject in the west following crashes across a wide swathe of the developed world. Such an experience can only heighten one's sensitivity to bubble-like characteristics in other markets. When we look at China, one can find an example to support just about any hypothesis.

A number of examples include: The case of massive vacant cities that are still unoccupied in Inner Mongolia is used as an example of overbuilding on a grand scale.

Drive around the Pudong financial district of Shanghai with an informed local and you will see vacant office towers where the developer miscalculated demand and didn't have the right connections to ensure a higher occupancy. .

Mrs. Treacy pointed out a blog post to me last week where someone had attended a property road show for a new development in the Southern metropolis of Guangzhou. Property was trading at approximately $300 a square foot. More than a 1000 contracts had been signed on a single Saturday.

Reports have also been circulating that Li Kai Shing, Asia's richest man and an astute property investor, is diversifying out of China and Hong Kong.

What can we conclude from this? Increasingly high value manufacturing, a growing services sector, relaxing of the hukou residency system, less reliance on farm labour and further urbanisation all support the case for property demand. On the supply side, a great deal of building has already occurred and prices are high. As with any market, prices are unlikely to come down until interest rates increase, supply increases further or barriers are removed to allow a freer market. To date measures to cool speculation have fallen most heavily on the banking and shadow banking sectors while the effect on prices has been muted.

The Shanghai Property Index has been ranging between 2650 and 4000 since 2010, with a mild upward bias evident since early 2012. A sustained move below 3000 would be required to question medium-term scope for additional higher to lateral ranging.

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