At a time when investors like James Chanos, CEO of New York City-based Kynikos Associates, is short China and China real estate because of his belief that, “China has been relying on a property bubble to spur its GDP growth,” savvy real estate investors are pouring money into China’s property market. Why the disconnect?
There are two reasons: 1) China’s curbs on real estate lending are leaving local developers short of cash, creating unprecedented opportunities for foreign investors to participate in China’s real estate development; and 2) fundamental, underlying demand for housing in China’s third- and fourth-tier cities is creating opportunities in cities whose names are unheard of to all but the most experienced China hands.
As to the first, there is no question that China’s measures to tighten its realty market is putting a squeeze on local developers. Concern that the Chinese economy may be overheating led the People’s Bank of China to raise interest rates five times and the reserve-requirement ratio 12 times since the beginning of 2010 to tame inflation. Some cities have imposed property taxes, down payments have been increased, and more second- and third-tier cities have announced measures to dampen housing prices. As a result, the outlook for mainland developers was cut to “negative” from “stable” by Standard & Poor’s in June, and the ratings agency said that tighter credit and further government curbs may lead to rating downgrades in the coming year.
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This has not gone unnoticed by Hong Kong developers, who are among the most cash-rich in the world and who are poised to snap up land in China at a time when the finances of their mainland rivals are being sapped by government property curbs. For example, Swire Pacific Ltd. recently sold a mall in Hong Kong for $2.4 billion, yielding funds that analysts say will be deployed on the mainland. And Hang Lung Properties Ltd., another large Hong Kong-based developer, has built up Chinese currency holdings of 20 billion yuan ($3.1 billion) that it says will be used for its projects in China.