Tuesday, May 11, 2010

Are China property prices high? 'Yes', and 'no'

Hang Lung eyes returns from China offices, not homes, says its chairman

ASK Hang Lung Properties chairman Ronnie Chan if there is a property bubble in China, and you are unlikely to get a straight answer.

It is all a matter of perspective to the 61-year-old, who has spent more than 30 years with the Hong Kong developer. 'Cyclically it is high, but systematically it is not,' he said, referring to the level of home prices in major Chinese cities today.

Mr Chan was speaking to The Business Times in Singapore, on the sidelines of a symposium on urbanisation and housing organised by the National University of Singapore's Institute of Real Estate Studies last week.

'If you were to compare Shanghai today with Shanghai five years ago, of course (prices are) high. But that is a wrong comparison,' he said. 'If you were to compare Shanghai today with Hong Kong, Singapore, New York, London, then (prices are) still very cheap.'

Holding a different view from Mr Chan is Joseph Gyourko, a professor at the University of Pennsylvania's Wharton School. He was also in town for the symposium and told BT: 'In China, particularly on the coast, prices have escalated sharply. Price-to-rent ratios have gone up very, very sharply and they look unsustainably high.'

Land prices in Beijing have also increased 10 times since 2003, he added. These changes are 'potentially foreboding' because 'real fundamental demand rarely changes by that much over that short a time period'.

Whether home prices are too high or not, their fast pace of increase has gotten the Chinese government worried. The state has been implementing a series of anti-speculation measures in the last few weeks, causing home sales to dip. Analysts are expecting price falls of 20-30 per cent to follow.

The cooling measures have introduced caution to the stockmarket, and developers with exposure to the Chinese residential sector have seen their share prices slide. China Vanke, for instance, has dropped more than 20 per cent from a month ago.

Even Hang Lung, which has a diversified property portfolio in Hong Kong but just commercial and retail properties in China, was not spared. Its share price has gone down by some 12 per cent in the last one month.

Hang Lung is behind Plaza 66 in Shanghai and other developments in cities such as Tianjin and Shenyang. It has no plans to start building homes in China, and that has nothing to do with the recent tightening rules.

'If I have to craft my strategy according to what the government does today or tomorrow, I'm really foolish,' Mr Chan said. 'You've got to have a strategic view of the market.'

There are a lot of big players in the residential sector and the tax on selling homes is high, he explained. Also, China remains socialist in nature. 'In order to maintain stability and harmony in society, the government will ensure that (home) prices don't go too high.'

Taking all these factors into account, risk-adjusted returns from the commercial business are much more attractive. 'We're able to get 30 per cent unleveraged cash to cash return on our commercial properties from rent alone,' he shared.

The residential sector in China 'can be a great market to make a lot of money but it is also a very treacherous market where you can lose your shirt', he said.

Hang Lung's interest in building homes remains in Hong Kong, and Mr Chan believes that the territory will see more home buyers from China. This is even more likely should the yuan appreciate, as market talk has it.

Source: Business Times, 11 May 2010

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