The Urban Land Institute (ULI) released its Emerging Trends in Real Estate 2010 in December and made a swing through Asia as it reported its findings. On December 4, 2009 Amy L. Sommers, of Squire Sanders’ Shanghai office and Chair of the Real Estate Committee of the American Chamber of Commerce – Shanghai, welcomed representatives from ULI as they shared their findings on the US real estate market with the AmCham Shanghai Real Estate Committee. Among the Report’s observations on the US market is that 2010 may hold once-in-a-lifetime opportunities for cash-rich investors to acquire premium properties.
What about China? The ULI Report notes the danger of complacency in Asia, as the region appears to have escaped the worst effects of the global downturn. In late 2008 anticipating the fallout from the financial meltdown triggered by Lehman Brothers’ bankruptcy, China’s government announced that it would adopt an aggressive economic stimulus plan beginning in 2009. This plan projects 4 trillion RMB (approximately US$570 billion) in spending over two years. It has been been criticized as being considerably smaller than advertised because the central government funded only about one-third of the expense (and 80 percent or more of that amount was already projected to be spent in the current Five Year Plan), with the balance expected from local governments, loans and private sector investment. Such observations have some validity, but what may not have been entirely clear to commentators at the outset of 2009 was the degree to which loosening of credit policies and growth in the monetary supply would be used as tools by China’s policy makers to achieve their stimulus aims.
Following the close of Q3 2009, the Bank of China noted the beneficial role credit has played in contributing to resumption of economic growth for China in 2009. As of September 30, 2009, M1 in China showed year-on-year growth of 29.5 percent, which was 20.1 percent higher than the same period in 2008. Aggregate loans grew at an even more rapid pace during this period, with the loan amounts in RMB at the end of September having grown 34.2 percent since 2008. This level of growth represented almost 20 percent higher growth in credit over the same period in 2008.1 A total of 9.5 trillion loans are expected to have been made by year’s end.2
By Q3 2009, most observers agreed that a significant amount of this credit had flowed into the equities markets and into real estate. As of December 8, the Shanghai Stock Exchange’s composite index was up 54.8 percent from the year’s start. And, real estate prices in various cities have been rising significantly. For example, housing prices in Shenzhen have doubled since the start of 2009. The economic crisis may have begun in the West with a credit bubble, but it did not start that way in Asia. Rather, the effects of the crisis in China were brought on by the interconnected nature of the world economy. Nonetheless, China’s response to the crisis may inadvertently be leading to an increased risk of a real estate bubble in the country.3 Observers expect therefore that in 2010 credit policies as to real estate will tighten.4 Given that much of the stimulus funds (whether from the budget or via loans) has been committed to capital-intensive infrastructure projects, however, this tightening is expected be gradual, rather than through a sudden decline in commitments.5
For investors considering a China play, careful attention will be required to consider the effects that China’s looser credit policy of 2009 (and to a slightly more limited extent), 2010 will have on the market’s prospects. As of publication, the main impact of the world economic crisis in Asia’s real estate markets, noted ULI’s Stephen Blank, senior research fellow, in his remarks to AmCham Shanghai, has been local players taking advantage of the opportunity to snatch up premium projects owned by foreign investors. The news that HNA Group (the parent company of Hainan Airlines) is expected to acquire the two hotels under development in Shanghai’s Xintiandi under the Jumeirah Group and Conrad Hilton brands reflects this trend. 2010 should provide a chance to see if it will continue. Additionally, will the rising prices in China’s top cities lead to a renewed consideration of second and third tier cities? Finally, can China put the brakes on the rapid growth in credit and real estate prices observed in 2009?