Cashing in on China’s Real Estate Bubble! December 28, 2008
The dramatic increase in residential and commercial construction in China over the past six years has fueled the creation of a classic speculative bubble which is now in the process of bursting. The decline in property values is being exasperated by the meltdown in the US financial system which has led to the steepest recession in the United States since 1981. The situation is being exasperated by the rapid decline in exports from China to the United States which is creating significant strains on the economy of coastal China which is being buffeted by wide scale bankruptcies and rising unemployment which will further impact the property market for that region.
We believe that property values in the greater China region will decline by 40-60% during the next 18 months and some areas like Hong Kong could experience even more significant declines. In Shanghai home prices fell 19% in the third quarter alone and construction is expected to contract by more than 30% in 2009. Many developers are now facing a liquidity crunch and as a result they are unable to complete existing developments and or have dropped plans to begin new projects. Additionally many prospective buyers are walking away or demanding new terms on existing contracts which has aggravated the situation even further.
What makes the greater China Real Estate market unique to other markets is the fact that the Asset Back Securities market is in its early stages of development and most home buyers traditionally take on minimal amounts of debt which averages less than fifty percent of the value of the apartment or home in question. Additionally hundreds of millions of rural Chinese are expected to migrate to the coastal areas over the next 20 years creating additional demand for housing. The shortfall between existing housing and current and expected demand is significant and as the Chinese economy continues to expand so will the demand for housing.
Therein lays the opportunity! For the savvy investor that is able to cash-in on the coming Chinese distressed Real Estate market the returns will be substantial as they will be able to purchase developments and undeveloped properties at a dramatic discount while concurrently leveraging a steep decline in raw material and labor costs as well! The net result will be a significant ROI over the next 5-7 years that could exceed 20% per annum. That ROI will be enhanced by the massive fiscal stimulus package that is now being unleashed by the Chinese government. The challenge, identifying the optimal investment vehicle which in our opinion should be based on a well established local developer that has market knowledge and the relationships within the government to get things done!
A Global Wave of Stimulus is Unleashed! December 11, 2008
Not since the Marshall Plan that was created to rebuild post-WWII Europe has the world seen the level of infrastructure investment and stimulus that is now in the process of being unleashed. China fired the opening salvo with a $585 Billion dollar plan that is equal to one fifth of that country’s GDP. Over an eighteen month period massive investments will be made in roads, ports, nuclear power plants, rail and other types of infrastructure creating a multiplier affect on that economy that could exceed $1 Trillion dollars.
But China’s plan may soon be dwarfed by the Obama’s stimulus plan which we believe will exceed $800 Billion dollars. We expect the Obama plan to address traditional areas of infrastructure to include roads, bridges etc. while concurrently focusing on the infrastructure of the 21st century which would include creating a digital electric grid, renewable energy, high speed rail and universal internet connectivity. Many other countries are preparing their own stimulus packages albeit of differing size and scope. So what will the impact of this unprecedented investment in infrastructure be? In short we believe that it will be significant!
While we do not believe that the impact from these investments will begin to be felt until the second half of 2009 we expect that when the wave begins to crest it will reverberate across global capital markets. In the United States we estimate that 2-3 million jobs will be created as a direct result of the stimulus package and that 1-1.5 million jobs will be created as an indirect result of this investment. The net result will be an increase in consumer spending and a concurrent increase in imports to the US market. However as a key component of the Obama plan is energy independence we believe that intense downward pressure will remain on oil through 2009 and beyond.
In China the stimulus package will help to begin the critical process of reorienting that economy to a more balanced consumption driven growth model as opposed to the current export driven model. As with the US plan we do not expect that the results of China’s stimulus plan will begin to be felt until Q3 of 2009. In the short term there will be a significant deterioration in China’s property markets, a loss of export related employment and a reduction of imports.
So what sectors will benefit the most from this global event? We are focusing on the following areas of opportunity for China in the short term; heavy equipment, power systems and network systems. While longer term we believe that the new consumer will drive growth in sectors to include; Distribution & Logistics, Renewable Energy, Environmental Services, Private Education, Private Healthcare and Media & Entertainment!
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