Something’s gotta give

January 29, 2014 admin

In my most recent Publisher’s Note, I wrote about “black swan” events — possible unexpected calamities that may occur in 2014. Black swans usually occur during Minsky moments, sudden financial collapses, when people are lulled into an unwarranted sense of security by a prolonged period of prosperity and stability. The longer the period of prosperity and stability, the harsher the shock from the “unexpectedly” imploding economy.

Which economy would qualify now as having had a long and stable period of development and relative prosperity? As you may guess, the answer is China.

China has not had any serious setback in the almost 30 years of its “long march” to prosperity. Many investors have lost their shirts betting against China, but paying close attention to the most recent development there may be warranted at this time.

Economic data is notoriously unreliable in China. Even Chinese government officials have admitted this. So what is the best way to assess the situation there? What can serve as a canary in the coalmine?

One of the ways to get a better understanding of what is going in real estate markets is to see what local first-comers are doing. And no one is better for this role than Li Ka-Shing, who has earned the nickname the Warren Buffett of Asia.

In an earlier blog post, I mentioned that Li has started selling his properties in China. At that time, this could have been normal profit taking; you’ve got to take money off the table from time to time. Since then, there has been more news of Li selling even more of his holdings.

Altogether in 2013, Li sold four of his primary holdings in prime locations, including the Oriental Financial Center in Pudong, Shanghai; the Metropolitan Plaza in Guangzhou; and the Nanjing International Finance Center in Nanjing. More telling is the fact that his son Richard Li is selling his Pacific Century Place in Beijing for a reported price of $900 million. Analysts have been reporting rising rents and increasing profits at the PCP, so from a conventional point of view, selling such a gem doesn’t make much sense.

At the same time, The Blackstone Group, The Carlyle Group and other U.S. private equity heavyweights have been piling into China acquiring local developers, properties and forming joint ventures.

It is normal for investors to diversify and invest in markets other than their own turf. But if profitable opportunities abound in Chinese property markets, why do we see so much Chinese capital flowing into overseas properties? What do Li and other Chinese investors know that their counterparts from the United States don’t?

Has the Minsky moment arrived in China?

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Alex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.

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