BMI: China RE poised for ‘hard landing’

High prices and excessive borrowing from the country’s banks are some factors keeping the mainland property market in increasingly precarious 'bubble territory', according to Business Monitor International (BMI).

High prices, overinvestment and banking sector risks are three factors that are keeping China’s property market in “bubble territory” and poised for a “hard landing”, according to a global financial analysis firm, sister publication Pere reports.

Marina Petroleka, head of energy and infrastructure at the independent country risk and information group, Business Monitor International (BMI), told a conference hosted by law firm CMS Cameron McKenna that the ratio between earnings and house prices in certain Chinese markets had become unsustainable. Given that factor, she said the lofty pricing that many Chinese developers are working to, coupled with excessive borrowing from the country’s lenders, had given BMI cause to describe the country’s property market as remaining in “bubble territory”.

According to BMI statistics, Chinese people have been paying for their homes at a ratio of 9.5x earnings. Meanwhile, residential investment to GDP already had reached 12 percent by 2011.

She added that a correction in China’s housing market would create shockwaves for its big four banks: Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China, traditionally significant sources of finance to real estate developers. According to China’s National Bureau of Statistics, real estate makes up some 30 percent of the banks’ total fixed asset investments in the county.

She drew particular attention to “wealth management products” being sold off the banks’ balance sheets to retail investors, stating these are providing much of the liquidity surge that has led to a rally late last year in the market. She said they bore the hallmarks of sub-prime mortgage securities offered in the US immediately before the global financial crisis.

“We see two issues with these: off-balance sheet loans we can safely assume are not of great quality. They also have short-term maturities yet are backing long-term assets. What if there is some sort of liquidity crisis and these retail investors don’t provide the capital they need to? Most likely the government will step in and throw money at the problem but you can’t get growth that way.”

Should such financing become untenable and the country’s real estate remains oversupplied and under financed, then a correction for China’s state-owned banks could have a profound effect on the county’s economy, she forewarned.

Petroleka’s address came in contrast to a keynote immediately afterwards by Jeremy Kelly, a regional director in the research division of global property services firm Jones Lang LaSalle, who presented the firm’s annual research on the 50 Chinese cities, ex-tier I, that offer the best real estate investment opportunities.

Kelly acknowledged China presented many obstacles to investors keen to make inroads in the country. He said: “There are many elephants in the room.” He underlined Petroleka’s concern about liquidity issues and warned of supply/demand imbalances, poor transparency in certain markets, a lack of professional property management, city governance and policy shifts, local government debt and property taxes and homogenous economic structures.

But he said he “couldn’t understate the growth metrics” the markets outside of China’s tier I cities of Shanghai, Beijing, Guangzhou and Shenzhen, had to offer. According to JLL the 50 cities figuring in its research – including cities like Chengdu, Chongqing and Wuhan – account for an economy worth $3 trillion.

He promoted retail and logistics real estate – the two sectors closest to the country’s ambition to switch to a consumer driven economy  – as the most attractive markets. The research revealed that the institutional grade retail stock in these markets will reach 137 million square metres by 2020 from just 13.4 million square metres in 2005. Logistics real estate, meanwhile, Kelly said was a sector currently grossly underdeveloped with just approximately 13 million square metres of Grade A space currently. “But it will be the backbone of the economic modernisation of China,” he said.