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The
quick answer is a very probable ‘yes’. How
long will that take? Say 5 or more years. Reasons?
The usual would include ones you have already read in the newspaper such as the
prospect of WTO, the so many billion people market (Author’s note = this may
apply if you sell commodities and services that almost everyone uses e.g. soda
pops, soaps etc but real estate developers and investors need prosperous cities
with increasingly well off city folks. Even
at that you do not need a dozen of such cities, a couple of good ones would be
more than sufficient to build up a viable real estate development operation),
trade surplus, a talent pool of well-educated urban professionals, a huge
interest from foreign investors, an emerging middle class in certain major
cities or even the 2008 Olympics. No doubt there are quite a few risks too,
including the relative poverty in the western provinces, or having
administrative policies and taxation structures not entirely conducive to
achieving viable real estate investment returns, to name a few. By
no means
is the above a crystal ball suggestion without default risks and even if one
assumes the macro trend is there, the markets may not be suitable for all
investors. The latter is advised to consider the pros and cons and see if these
fit into one’s operational criteria, resource capacities and return / risk
expectations before any leap is taken. Nonetheless,
the following constitutes part of the reasoning, using a GDP per capita
expectation approach: a)
Beijing
and Shanghai’s GDP per capita are now reportedly close to US$4,000
= this is based on information reported in the media and in real estate
brokerages’ presentations, notwithstanding other higher figures such as
US$10,000 to 20,000, or even US$60,000 had also been stated by some. No detail
investigation has been made to find out how these various figures have been
arrived at or on what they are based (nominal GDP, PPP etc). Some discretion is
required and perhaps it is safer to lean on the more conservative side i.e.
toward the US$4,000 level, especially when compared to China’s average GDP per
capita of around US$1,000 [it is not unreasonable for a developing economy to
have its urban GDPs larger than its national average by several times], or for
that matter to those of a few more advanced economies such as the USA
(US$30,000), Japan (US$33,000), South Korea (US$8,600) or the UK (US$22,000)
etc. All in all, it is felt that the lower range may better reflect the economic
capacity of the cities. In any event, US$4,000 per capita generally signifies
having an emerging middle class. b)
Real
Estate Prices generally reflect the economic performance and earning power of
its populace = especially
the residential real estate sector. The US$4,000 per capita could be a ten-fold+
increase of what these cities might have some 20 years ago when the open door
policy was at its infant stage. Say for the next 20 years this rate is to be
reduced by half to a five-fold increase only. Spread evenly, it still implies a
US$4,000 nominal increase every 5 years, not even counting the possible trend
that the earlier years may bring in the bulk of the increase. On an internal
rate of return basis, this works out to be close to 15% and it has not factored
the use of financial leveraging and rental income in the equation. Nonetheless,
this assumes the current prices being at ‘explainable’ or non-bubbly levels.
In any event, when the GDP per capita goes up by 100%, it would be rare to find
the economy’s asset prices, including real estate, not moving in somewhat
tandem fashion, unless some form of market intervention is applied. Whether the
increase is synchronized in time and in quantity is another question. c)
Going
from US$4,000 per capita to US$8,000 per capita is NOT overly difficult
(it does not follow to say that it is easy though) = as both figures are more or
less in the “trying to make it” economic stage of development, with one at
the lower bottom of the scale and the higher figure at the top of the same
scale. At this point some readers would be asking why we seem to be so sure of
this. We are NOT, but it is not entirely unreasonable to expect it. For
instance, based on reported statistics and on a nominal basis, Hong Kong’s
GDP per capita had more than doubled from HK$6,600 in 1971 to HK$14,000 in
1976, and then again to HK$33,000 in 1981. Hence, it is not unseen before.
Today, Hong Kong has a GDP of around US$24,000 i.e. roughly HK$200,000, still a
30-fold increase over the last 30 years despite having been slashed from the
high of US$28,000 in 1997. Depending on state of maintenance and other factors,
a proper residential property bought in 1971 is likely to have increased some
20-fold (+/-5) using today’s prices = some 40-fold (+/-5) in 1997 prices!
Naturally, what had happened in Hong Kong may or may not be repeated elsewhere. d)
Vacancy
rates are high, but their distribution may not be even
= that is, some properties rent or sell better than others. While there are the
(almost) empty buildings (especially in Shanghai), there are also a few that are
much sought after due to better location, facilities, management, competitive
pricing and so on. This implies the profitability is not evenly distributed too
= some poor operators will lose their shirts while the more efficient investors
with better properties will be rewarded. e)
Improvements
in hard and soft infrastructures = hard ones refer to tangible improvements such as in roads, bridges,
telecommunications and so on. Soft ones refer to improvements in business,
finance and legal systems and arrangements. Overall, the pace is relatively
fast, and many regular visitors including our colleagues, customers and friends
to these cities would no doubt attest to that. These improvements enhance the
values / prices of the economy’s assets. In
summing up, given all things being equal, the major cities offer some good
prospects for real estate investments, though investors are again cautioned to
do their homework real hard before making decisions to invest. Also, the above
makes no allowances for taxes and these could be hefty, thus requiring an
even higher return to justify investments. It
remains to be seen if the cities would eventually have a comprehensive, sizable,
efficient and viable private real estate market, especially on the residential
side yet some of the ingredients and favorable circumstances for success exist
today. There are some hurdles to tackle and things to watch out for, e.g. that
the seemingly wide wealth gap will not imply the non-emergence (non-existence)
of a sizable and financially strong middle class because without them, the scale
and depth of the market would be limited. Notes: The
article and/or content contained herein are for general reference only and are
not meant to substitute for proper professional advice and/or due diligence. The
author(s) and Zeppelin, including its staff, associates, consultants, executives
and the like do not accept any responsibility or liability for losses, damages,
claims and the like arising out of the use or reference to the content contained
herein.
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