Developing Asia is the theme of the upcoming issue of The Institutional Real Estate Letter – Asia Pacific. We’ll be using the word “developing” to cover a number of different article topics for the September issue, including:
- How the transformation from emerging to developing and developed Asian economies will affect the world’s financial system;
- More Asian investors developing portfolio strategies to include domestic and global real estate investment;
- Infrastructure investment and development in Southeast Asia; and
- Issues China faces in developing and reforming the country’s banking system and property markets.
With respect to the last item, Jack Rodman, a senior advisor of Crosswater Realty Advisors, explores in his market perspective the 10 things China must work to reform to “help prevent another — and far worse — global financial crisis.”
According to Rodman, when the interbank lending rate in China spiked in June, it “sent global markets reeling, signaling Chinese banks did not want to lend to each other.” This event put a spotlight on challenges within China’s banking system and real estate markets, which Rodman argues have been in desperate need of reform for quite some time.
Here’s a sneak peek at a few items from Rodman’s top 10 list of things China must stop doing:
- Gross misallocation of capital, especially to real estate and infrastructure projects
Valuations for many real estate assets are “unsustainable”. A large portion of real estate assets is owned by speculators for investment purposes. Valuations are often not grounded in a discounted cash flow analysis or comparable process and instead rely on unbridled speculation and the assumption of asset appreciation in perpetuity. - Mismatched maturities
Most real estate lending came in the form of short-term loans used to fund long-term infrastructure and real estate projects. This mismatch of maturities has caused problems around the world. With Chinese local government debt at 25 percent of China’s GDP, and the majority of this debt tied to real estate and infrastructure projects, mismatched maturities may spiral into substantial problems for China’s economy. - Unbridled bank lending and credit exposure to the real estate sector
Lending and credit exposure increased from 8 percent of lending a decade ago to somewhere between 40 percent and 50 percent of total outstanding bank loans today collateralized by real estate with “questionable,” if any, appraisals.
We hope you’ll enjoy this special Developing Asia edition of the publication.
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Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific
