“Crisis, what crisis?” cry China’s hundreds of thousands of developers in both residential and commercial real estate, in unison with their counterparts in the rest of the region, Japan excepted.
The volume of transactions tells the story. While deals remain largely stalled in the west, in Asia they bounded back during 2009. Total transactions in the region hit $119bn – and 67 per cent of that was in China – in the first nine months of last year. Indeed it’s fair to say that Asia was the only region where real estate isn’t under water.
In stark contrast to the train wreck that’s hit the property sector in USA, UK, much of Europe and particularly northern Europe where bankruptcies are off the scale, and parts of the Middle East, there’s been no crash in Asia. Indeed there have been only a handful of distressed sales in the entire region, once again with the exception of Japan which has been littered by bankruptcies. Property research company Real Capital Analytics reports only $29bn in Asia Pacific distressed sales through the first half of 2009, most of these coming in the first three months. In the Americas the equivalent figure was $136bn, nearly five times greater.
No fire sales
This is much lower than even Asia-based analysts expected and may have a lot to do with the culture. As a fund manager in Singapore told PricewaterhouseCoopers for the consultancy’s 54-page, annual Emerging Trends in Asian Real Estate, one of the most prized bodies of research in the sector: “Generally speaking, fire sales are frowned upon by government, they are frowned upon by business, and they are frowned upon, basically, by society.” Also, major investors often prefer to hold losing assets rather than lose face.
Inevitably, there was a shake-out in the first few months of the crisis as money tightened and deals slowed. However transactions in the commercial sector made a recovery that stunned observers. According to RCA, they bottomed regionally in the first quarter of 2009 before rocketing by 66 percent in the second quarter followed by a further 57 percent in the third quarter. “[That brought] them back to 2007 levels and makes Asia by far the most active global theatre in terms of sales,” summarises the PwC report.
Summarised, Asia is the only region where real-estate business is on the boil. With China inevitably making the pace through massive, economy-boosting injections of mainly government-sourced funds, transactions have well and truly taken off again. In the last quarter of 2009, sales of assets valued at $10m or more topped $60bn. That’s nearly three times those of the Middle East and four times those of the Americas.
The picture isn’t uniformly rosy however because of swings and roundabouts throughout the region. While most first and second-tier cities in China as well as Hong Kong rode the downturn, rents and values collapsed in Singapore and in some Indian cities, albeit from wild gains posted in the run-up to the crisis. “The contraction has been especially severe in the office sector, as export and finance-related businesses have come under pressure,” notes the PwC report. (Seoul, capital of South Korea, was the stand-out exception.)
And although by historical standards transactions are still down on the pre-crisis boom levels, there’s no doubt other regions would be more than happy to claim this level of business.
A different culture
From where did the region’s resilience spring? After all, this is the scene of the real estate-driven crisis leading up to 2000. Investors cite several robust reasons.
– Ample, bank-supplied liquidity kept afloat the minority of developers who were in trouble.
– Prudent loan-to-value [LTV] ratios meant developers hurting from declining rentals could still service their debt, although under the close eye of the lenders. “Ratios never reached the nose-bleed heights seen in the west,” opines the PwC report.
– The region exudes a confidence that’s not seen in the west – “business sentiment remains generally sanguine”.
– Importantly, lenders exhibit a patience with struggling borrowers that’s also not obvious in the west. “Local business culture generally frowns on foreclosures,” notes the report. A risk-averse financial sector helps here because fully-capitalised banks are less likely to force borrowers to sell. But, say insiders, the banks’ is cultural rather than technical. In Singapore, for example, investors can hardly remember when a lender took the ultimate action. “The banks just won’t foreclose,” says one source. “The last time there was a commercial foreclosure was something like 25 years ago. And in China you’ve basically got to be comatose, on your deathbed.”
– And related to the above, the commercial culture is much less litigious throughout Asia, in part because the law tends to be stacked in favour of borrowers in terms of repossessions.
China’s story
Commercial real estate aside, the pace of development in the residential sector is breakneck, and especially so in China. The mainspring for China’s rapid growth is what economists like to call endogenous – internally-triggered – factors. It all started in the late 1970s in the turbo-charged transition from an agrarian to an urbanised economy. Thereafter house prices increased in rapid bursts, rising by over 70 percent between 1985-1987 for example. Almost overnight, investment in housing became a viable proposition and a status symbol for all.
And although Beijing intervened in 2008 to slow things down, the government jumped into the market again in early 2009, this time to speed things up. It did so with a variety of measures including cuts in property taxes for first-time buyers and waivers on stamp duty and other taxes during a two-month window.
The main stimulus was however the $586bn that Beijing injected into the economy, freeing up the banks to pump out more mortgage money. This enormous sum came with specific allocations for housing and infrastructure. “Property prices raced upwards at a furious pace as real estate developers and home buyers jumped on the band wagon”, points out investment fund Thomas White International in an April report on the region.
Naturally, the sector is awash with liquidity. “Last year, you were lucky if you could borrow for construction.
Today, you can borrow long term for developing construction finance, you can borrow to buy land, you can borrow to buy a company, “one source told PwC. “There is virtually no end or no limit to the amount of credit available in China—we’ve gone from famine to feast in a matter of a few months.”
As a result real estate has become the glamour sector. As Thomas White International adds: “Real estate investment more than doubled to $156.2bn in 2009 compared to the USA which slumped 64 percent to $38.3bn.”
Foreigners remain largely excluded from the boom, deliberately so. Beijing has passed laws limiting foreign ownership of real estate, commercial or residential. However according to figures from the State Administration of Foreign Exchange, mainly speculative money has managed to slip through the net and accounts for roughly 15 percent of the Chinese real estate market.
Triple-figure revenue growth
Whatever the origin of the capital, there wouldn’t be a real estate company anywhere that doesn’t envy China Vanke, China’s numero uno in the sector. Voted by Euromoney to be the world’s leading developer in residential property for 2009, the firm has averaged earnings growth of 37.5 percent over the last three years on the back of the housing boom in the fastest-prospering regions of China where it mainly operates. The consecutive numbers are: 110 percent in 2007, minus 16.7 percent in 2008, bouncing back last year with 19.2 percent. The publicly listed firm derives 44 percent of its profit from five core cities – Shenzhen, Guangzhou, Shanghai, Beijing and Tianjin.
Revenue figures posted by other leading Chinese developers are similarly stupendous. China Overseas Land & Investment, the only Hong Kong blue chip in China’s real estate sector and a subsidiary of China State Construction Engineering Corporation – biggest firm of its kind in the country, returned three-year figures of 76.29 percent, 20.78 percent and 48 percent.
Topping them all is Evergrande Real Estate, which has adopted western-style strategies in planning and design, use of materials, bidding, project management and marketing. Holder of the largest land reserve among all mainland developers, most of them in second and third-tier cities, it posted a 233 percent jump in revenue in 2007 and, after struggling in the slump year of 2008, nearly hit 100 percent growth in 2009. A favourite with investors, Evergrande’s initial public offering on the Hong Kong stock exchange’s main board in November last year raised $722m.
Could we be seeing the beginning of a bubble? Sounding a note of caution, a study by Goldman Sachs points out that the rise in house prices “far exceeds the rise in incomes, by 30 percent in Shanghai and 80 percent in Beijing.” This year alone, prices in the big cities have jumped by 20-30 percent.
And, adds Thomas White International, the office sector is hardly slowing down. “Office sales prices in Beijing and Shanghai have continued to rise, despite an upcoming supply overhang expected to push vacancies even above the already high current rate of 30 to 40 percent.
China’s bank regulator is certainly worried, warning recently that this massive surge in lending may lead to a wave of bad debt down the road. The regulator would be somewhat mollified by the government’s clamp-down on indiscriminate lending, especially to speculators. Twice this year already, bank reserve requirements for development investments have been increased and the total volume of loans will be reduced by 22 percent over the rest of this year. Still, that still leaves up to 7.5trn yuan, or $1.09trn.
Top cities
Meantime the boom continues unabated across Asia. According to the latest rankings compiled by the Urban Land Institute, the current top three cities for prospective real-estate investment are all in China – Shanghai (up four places on last year), Hong Kong (which has benefited from a spill-over in investment from the mainland and is up by one place), and Beijing (up three places). However five of the other seven are outside China. They are fourth-ranked Seoul, fifth-ranked Singapore, seventh-ranked, eighth-ranked Mumbai and tenth-ranked New Delhi. Other regional cities such as Malaysian capital Kuala Lumpur and Singapore are working their way up the rankings.
The obvious implication is that the property boom is Asia-wide. The consensus of opinion is that it will slow down, but not by much.
