I would like to share with you some observations and news from China. The news that attracted my attention last week came from Jilin, a capital of the province with the same name in Northeast China. Real estate developers there used a rather unconventional technique to sell their properties. They painted floor plans of the units for sale on female models’ bodies and sent them to the housing fair to attract potential buyers. I am not certain whether this was a stroke-of-genius advertisement or a desperate move by a developer trying to get rid of his inventory.
Property sales slowed down in China after the government introduced cooling measures, but this was after millions of units had been sold to eager investors. News program 60 Minutes aired again last week an earlier report on empty cities in China. I saw the segment for the first time this week, and although I have heard about this situation, the picture of a huge number of empty residential towers did produce an impression on me. All these properties have been sold, in many cases for cash, and are sitting there empty, waiting for a bigger fool to come and pay an even higher price. If this is not a bubble, I don’t know what is.
We have already discussed the bubble situation in China in previous blog posts, and I want to bring to your attention something more interesting and telling this time. Several successful, experienced and fabulously rich Chinese investors/developers have started leaving their home turf and begun making acquisitions in overseas markets.
Wang Shi of China Vanke, the largest developer listed on Chinese exchanges, has recently formed a joint venture with Tishman Speyer to develop a luxury condominium project in San Francisco. He has been warning of a real estate bubble in China for quite sometime. At a conference I attended several months ago in Shanghai, he clearly said there was a bubble in China, and he repeated it during an interview for the above-mentioned TV program. But according to him, it will last for a while due to unique Chinese factors such as people’s propensity to own real estate and continued urbanization. So his foray into an unknown market didn’t come as a surprise.
Famed Chinese investor and developer Zhang Xin of SOHO, together with Brazilian banking tycoon Moise Safra, paid $1.4 billion for a 40 percent stake in the General Motors Building in midtown Manhattan. It was not disclosed how much of the $1.4 billion was her part, but it clearly constituted a big chunk of her personal net worth estimated at $3.6 billion. Most recently, Shanghai-based, government-owned developer Shanghai Greenland acquired a stake in a huge vacant lot in downtown Los Angeles that was considered to be the biggest U.S. deal made by a mainland Chinese developer. The company committed to invest $1 billion, beating all previous investments by Chinese firms in the United States.
You may say this is just diversification, and I would agree with you, but the question I cannot answer is why this is taking place now and not three, two or even one year ago. Could it be that a few successful investors who are intimately familiar with the local environment in China sensed a change in the trend and started taking measures to protect their businesses, while the crowd, true to its instincts, failed again at the inflection point in the trend?
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Alex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.
