News and commentary

RightSide Commentary -Internationals

By Vivian Lewis
Updated: Wednesday, May 07 2008 01:05:PM

 Chinese-American reader D. Wong wanted to give me his "two bits" on Chinese real estate. He writes:

 

     "My impression when I tried to look for revenue properties in Shanghai and Guangzhou was that the [current] rent return is only around 2% per annum. Only expats can afford to rent. Wealthy Chinese buy. Thus most of the flats bought by speculators actually sit empty. There are many well-to-do Chinese but the flats are priced out of reach for ordinary salaried people. The Chinese like to speculate from stocks to houses to paintings and there are no bargains short term.

   "The owner only buys a 50-year lease to use the land from the government. Regulation is not clear what will happen after 50 years. Fifty years have not been reached from the fall of communism. But with widespread property ownership I don't believe the government will do anything to rock the boat probably just charge a sumptious fee to renew. Also individual ownership of commercial properties [is] not allowed.

   "Chinese companies depend too much on the founder and main shareholder. Even if the company is profitable you have to depend on an ethical owner to actually distribute the wealth. The bad ones just cook the books. With something like real estate ownership there are too many recipes. The government also passed new laws recently making hoarding of land illegal to snuff speculation hence the big correction on the developers. (If land is not developed within certain time it reverts to the govt) [at] semi-sane value. Extreme social upheaval was involved in buying land from peasants and evicting ones who did not want to sell. Riots, deaths, bribery, and [law] suits were involved. 

   "I looked at Shui On(HK: 0227), developer of Shanghai and Hangzhou's Soho district, with a valuable portfolio of land bought at much cheaper prices 10 years ago and many projects in secondary cities near completion in the next 2 years with a fat return on the bottom line expected. Vincent Loh is from Hongkong and has a reputation of fairness to small shareholders.

   "The other one is Hongkong developer Hutchinson Land. Its founder Li [Ka-Ching] just moved in with a big stock purchase [by] his private company. It has dependable book[s] from HongKong, strong balance sheet (again with a huge landbank bought earlier), and the cash to develope it before the govt can confiscate it for hoarding. Connection means everything in China. Loh and Li have [access] to high places. Both [are]members of the executive committee of the People's Congress. These companies' P/E ratios are 12.

    Mr. Wong then adds gently: "I like you am rosy on Chinese real estate and the renminbi's long term future. But I am happier to buy at a level when the rent return actually beats putting money in a savings account and some of the speculators are washed out. On the other hand I was saying that 5 years ago."