Posted on 08/18/2004 8:46:36 AM PDT by TigerLikesRooster
China's property market not in the pink of health
Greedy developers and low interest rates push up supply of residential and office space, but where are the buyers?
ZHONGSHAN - China has a serious problem these days, and its colour is pink.
Pink and similar hues - from rose-tinged brick to tangerine and even magenta - have been popular in the past few years with Chinese developers, who are also partial to tinted, highly reflective glass and rooftops in the shape of lotus blossoms.
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The result is an extraordinary number of garish apartment buildings, office buildings, industrial parks and houses, especially here in south-eastern China.
But the big problem for China is not so much that these new buildings are hideous, though many are, but that an extraordinary number of them are empty.
A sixth of the luxury residential real estate in Shanghai is vacant, a quarter in Beijing and a third in Shenzhen. And in the next several years, the number of unoccupied buildings is expected to increase considerably.
Experts predict that the supply of office space will rise by as much as 50 per cent in the next couple of years, while forests of luxury residential buildings are being completed in Shanghai, Beijing and elsewhere.
Nobody knows who will buy up this pink profusion.
Real estate prices are already so high that buyers of new apartments in Chinese cities often pay a price equal to 10 to 15 years' of their income. In the United States, the national average is closer to 3.5 years' of income, according to Morgan Stanley. China's property boom raises fears of a price collapse.
As in the US, home buyers in China have been able to afford stratospheric prices because they have been borrowing at very low interest rates.
Government-owned banks have long charged a government-mandated interest rate of 5.31 per cent for many loans.
With inflation in prices paid by consumers hitting 5.3 per cent in China in July, and nearly twice that for business-to-business dealings, which are less regulated, borrowing money is attractive for anyone with the political connections that are often needed to get a loan.
But the big question is whether real estate bubbles might start popping in big Chinese cities. In Australia, housing prices started to fall after interest rates began climbing. Yet in China, little seems to deter the developers, who until recently kept borrowing and building.
Many developers make their real profits by pocketing a big part of a project's construction costs by steering contracts to builders in which they hold stakes. Then, if no one wants to lease the finished complex, the developers simply stop making payments to the banks.
Chinese banks, in turn, are slow to foreclose on developers. This is partly because the developers often have political connections and partly because the banks also face legal difficulties in selling or leasing buildings on which they have foreclosed.
Beijing has been trying to slow its runaway economy this summer by limiting bank loans, especially for real estate development.
A multinational banker in China said that he had already been approached by several large developers who were desperate for loans because they had been suddenly cut off by the government-owned banks.
'Those developers are scrambling to talk to whomever they can talk to,' the banker said.
China's big banks required three large bailouts in the past seven years, and the question now is whether they will require another.
Bad loans 'will definitely rise in the quarters ahead' as the real estate boom slows, said Mr Frank Gong, the chief China economist for JP Morgan. -- New York Times
Ping!
Yep, sounds very familiar indeed...
Japan is still recovering from their real estate bubble of the 1980s.
Hmm, Maybe that Arkansas Finance Wizard $hrillary ("Cattle Futures", Madison Guaranty S/L, Whitewater, Chinagate) should volunteer her (*smirk* :) wisdom to her Marxist/Stalinist brothers... :/
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