Shanghai: What Real Estate Bubble?

More and more big-name investors are buying up commercial properties

Property speculation is the hottest topic in Shanghai. From the cafés along the city's famous Bund riverfront to the karaoke joints of the Xujiahui entertainment district to the laundry rooms in the massive apartment blocs on the city's southernmost fringe, one question is on the tip of everyone's tongue: Is a bubble developing in the real estate market?

It's a reasonable point to ponder in a city where the price of residential property has risen nearly 20% over the past 12 months. But judging from the flurry of deals being done by some of the world's most sophisticated global investors, clearly not everyone thinks the boom has peaked. Morgan Stanley Real Estate Funds teamed with local developer Shanghai Yongye Enterprise Group and two Singaporean partners in June, 2003, to pony up $90 million for a high-end apartment complex in downtown Shanghai called Jinlin Tiandi. In January, Macquarie Global Property Advisors of Australia paid $98 million to buy 95% of Xin Mao Tower, a 20-floor luxury office building. And in April, developer CapitaLand Ltd. of Singapore announced that Goldman, Sachs & Co.'s (GS ) real estate division, Whitehall Funds, had paid it $107.6 million for Pidemco Tower, a 24-story commercial building in Shanghai's central business district. "The fundamentals in commercial property in Shanghai are very positive," says James Quille, CEO of Macquarie Global Property Advisers in Hong Kong. "And there is a well-trodden path in terms of how capital is structured and repatriated."

Unlike hot-money investors rushing in -- and out -- of emerging markets in search of a quick return, these white-shoe institutions say they're taking a longer-term view of Shanghai's real estate market. They aim to earn steady returns of 16% to 18% from rental income for their investors, which include pension funds and insurance companies. A handful of big names are already in the market. Other real estate funds looking at Shanghai property are sponsored by Deutsche Bank (DB ) and CSFB (CSR ). "Everybody is knock- ing on our door looking at deals," says Walker J. Wallace, partner at O'Melveny & Myer LLP's Shanghai law office.

The funds say that since they are investing mostly in commercial and retail properties, where the market is less frothy, the risk of a downturn is low. In fact, prices for top office buildings have only increased about 5% in the past 24 months, according to global property consultants Jones Lang LaSalle. Even if the market weakens in the next few years, these funds say they have a 5- to 10-year horizon. That of course assumes prolonged economic and political stability. Even the real estate investors acknowledge that in China's volatile market, anything can happen.

Shanghai's real estate prices fall significantly with close to 50% drop in some areas -claim

Shanghai's real estate prices fall significantly with close to 50% drop in some areas -claim

Shanghai. June 16, 2005. INTERFAX-CHINA -Property prices have dropped in Shanghai, the most active property market in China, as government measures such as raising taxes and restrictions on sales begin to be felt.

Statistics compiled by an official website show that last week (May 31-June 6) prices for Shanghai residential properties were down an average 18.5% to RMB 6228 (USD 752.17) a square meter from the previous week..

The statistics are compiled by eHomeday (www.ehomeday.com), the official website registering Shanghai's property market transactions. The biggest fall in residential sales was in Pudong New Area, which registered an average decline of 49.3% in the week. Meanwhile, the number of transactions have increased to 1.3% with 2516 properties changing hands in the week, with low-and-mid-end properties enjoying increasing popularity.

"The downtown area has seen a fall in prices, while the prices of properties in outskirts have increased recently," Ms. Huang, an official with eHomeday, told Interfax.

Image: Night Scene in Shanghai's Pudong New Area

Shanghai's combined index for housing prices rose by 1.1% percent to 1,513 points in May. Sales of used homes rose in mid and late May, as both buyers and sellers hurried to make deals before June 1, the deadline for new government policies to come into effect. Measures were announced last month by seven key ministries and government authorities including the People's Bank of China and Ministry of Construction to cool off the real estate market. According to the measures, property owners who sell within two years of purchase will have to pay tax on the full sale price. The measures were mostly to prevent speculators investing in property, which artificially raised the overall market price, especially causing difficulties for mid to low income families.

Several real estate agents and research centers, including eHomeday, Centaline (China) Property Research Center and the Shanghai Index for Housing prices Office, however, declined to speculate on the future prospects of the Shanghai property market, saying it is a too sensitive a topic to talk about at the moment.

Shanghai Real Estate Analysis

"I believe the property prices will remain fluctuating within a narrow band, and no dramatic drop will occur, at least not this year," a property analyst, who wished to remain anonymous, told Interfax.

The real-estate market, especially in Shanghai, is a very sensitive area currently. Both local media and officials are following government guidelines in not causing 'market disorder.' This means they cannot offer official comment other than that specified by the government. Shanghai is especially sensitive as a property bubble has built up, following rampant speculation in housing. The government hopes to cool the market following its recent measures, though many market observers are not convinced the measures will work. Property prices in Shanghai have risen by more than 200% over the recent 2 year period. The speculation is compounded by the long-term slump in the stock market.

China puts brake on Shanghai's real estate boom
06/25/2005 (Asahi Shimbun)

SHANGHAI-Property values were soaring and the real estate market here was booming-until this spring, when the Chinese government started to fear a bust.

Worried that the runaway market could lead to an asset-inflated bubble economy, the government began to introduce measures to curb the rise in real estate prices.

One of the dampening measures includes the imposition of taxes on profit from the quick resale of real estate.

Those hardest hit by the new rules are mostly middle-class investors who rushed to buy condominiums at the peak of the boom.

A 26-year-old woman who works at a foreign firm in the city

says she is so worried about the market situation she cannot concentrate on her job. She doesn't know if she can resell her condo or if she will be plunged into serious debt.

The woman, who gave her name only as Zhu, receives several e-mail messages daily from a real estate agent. Mostly, it's bad news, such as: The market price for condominiums fell by 20 percent in one month.

In March, Zhu bought a unit in a multistory condo under construction in a residential area about a 30 minute-drive from the city center. The 135-square-meter unit was priced at 1.31 million yuan (about 17 million yen).

She put down an 860,000-yuan deposit. To make the payment, she used 150,000 yuan from her savings and borrowed 710,000 yuan from a bank on a 30-year loan. Zhu said the bank gave her the loan after only briefly researching her financial records.

Zhu earns 7,000 yuan monthly, which is relatively high in China for people of her generation. Of the 7,000 yuan, however, 5,400 yuan goes to repay the loan, she said.

Zhu now refrains from going out or dining with friends. She doesn't buy cosmetics, clothes or cigarettes.

This is Zhu's second go-around in the real estate market; the first time was much more profitable.

In October 2003, right after landing her job, she purchased a 38-square-meter condo for 240,000 yuan, planning to live in it. In December 2004, she resold it for 350,000 yuan. The profit lured her back into the real estate market.

Zhu said she did not intend to live in the new 135-square-meter condo when she bought it. Her plan was to resell the condo once it was built, pay off the loan and earn a hefty profit.

Now, Zhu is worried about whether she will break even.

Not only entrepreneurs, but also many individuals like Zhu, have embarked in real estate investment in Shanghai.

Some investors buy entire buildings and resell them shortly after.

The total market for real estate in Shanghai in 2004 reached 226.3 billion yuan, up 60 percent from the previous year.

According to the Shanghai city government, the average housing price increased by 15.8 percent in one year. In the central part of the city, the rise was a spectacular 27 percent.

This spring, however, the central government, which had been encouraging real estate investment, began to take action to curb property speculation, not just in Shanghai, but also in other major cities.

The government clearly wanted to avoid a collapse of the real-estate bubble, with investors unable to pay bank debts, leaving banks with huge amounts of bad loans.

In a government report released in March, Chinese Premier Wen Jiabao said: "Both an overheated or cooled-down economy is disadvantageous. The government will put the brakes on the rise in real estate prices."

Shanghai is also following the central government's move.

In March, the city government began to impose a 5-percent tax on profits when investors resell real estate within a year after purchase.

In April, the city government prohibited its citizens from taking out a second loan before repaying the first one.

Meanwhile, the People's Bank of China raised housing loan interest rates in March. The lowest interest rate for loans of five or more years was raised 0.2 percentage point to 5.51 percent.

The bank also set the minimum down payment for real estate at 30 percent, up from 20 percent.

On June 1, the central government introduced a 5-percent tax on profits for investors nationwide who resell real estate within two years of purchase.

With all those dampers, a wait-and-see mood in the real estate market has spread.

According to ehomeday.com, the largest housing information Web site in Shanghai, the price per square meter for a new condominium in a city suburb declined from 17,000 yuan in March to 14,000 yuan in April and to less than 13,000 yuan in May.

The price for a condo in the Pudong district, which is known for its high-rise buildings, dropped 17 percent in the two-month period.

The market price for conventional condos in the city is on a downward trend with huge fluctuations. The average square-meter price for a condo dropped sharply from 10,000 yuan in April to 5,500 yuan on May 24. That was the lowest recorded this year.

However, some experts said a drastic decline in real estate prices is unlikely to continue.

Zhu Zhendong, an adviser to Shanghai Yijie, a real estate firm with wealthy clients, said: "The central government introduced the measures to prevent those without enough funds from embarking in real estate speculation. Wealthy people are not affected by them."

Most of the firm's clients, who are investors based in Taiwan and Hong Kong, are optimistic, expecting a rise in their property values by a possible higher appreciation of the Chinese yuan against the U.S. dollar.

Xiao Minjie, a senior researcher at the Shanghai office of Tokyo-based Daiwa Institute of Research Ltd., said, "The real estate investment boom will come back again after a three-month wait-and-see period."