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Ox, Shmox, It's Gonna Be A Pox. Why I Have No Faith In Chinese Real Estate For 2009.

By Dan Harris and Steve Dickinson

First, let me get my biases/perspectives out on the table. I am a lawyer. What this means is that no matter how much the media may tout me as riding some sort of second wave (check out this super-cool article!), my training compels me to look at everything with a jaundiced and conservative eye, particularly investments. I never lost a dime on the dot.com bust because by the time I was thinking I might at some point get comfortable enough to invest in a business I could not foresee ever developing a way to make a profit, the crash had already occurred. Many years ago, when my law firm (that's my money too) rented a condo in Qingdao and then in Shanghai, I looked at buying property in China, but always blanched. Though I saw China's long term potential for real estate, what with some 200-300 million more people expected to fill China's urban areas and all, I could never get past the rows of empty buildings and the fact that the rental rates were way too low in proportion to the selling prices. I mention all this so everyone will know that I am a coward when it comes to investing and so can blame that on my completely not buying the idea that 2009 is going to be a good year for real estate in China, no matter what Sam Crispin is telling us. Sam Crispin owns and runs a real estate consultancy practice in China, which no doubt means he knows more about China real estate in his little finger than I do in my entire body. Nonetheless, I am not buying what he is selling. In a China Herald post, entitled, "Rebound in China real estate expected in year of the ox," Crispin tells us to expect real estate in China "to rebound over the coming twelve months as the central government is reversing its policies." He goes on to say that he expects "most of the government measures brought in to control the property market since 2004 to be reversed in stages." He sees "government intervention to support the market ... as "cause for optimism." Wrong, wrong, wrong. First off, the government measures that were enacted to control the market were not that big a deal in terms of pricing. Yes, there were measures that limited real estate buying by foreigners, but those measures were enacted more for PR reasons than because they would have much downward influence on pricing. And those measures are still in place in any event. Yes, the government did enact a tax measure or two in an effort to slow down speculation, but if China property were red hot right now, buyers would be blasting through those like a fleeing bank robber going through a 25 mile construction zone when fleeing the scene. Secondly, I just cannot see China's government literally intervening to support real estate. Yes, they may loosen the restrictions on foreign buying a bit and yes, they may reduce taxes on sales a little bit as well, but that is not really "intervention" and I do not think these things will do much more than move a few extra people to buy. I do not see government loosening as leading to much in the way of China real estate price increases. So what we really need to look at to determine China real estate prices in the next year is supply and demand. And it is on the demand side that I see problems. The world economy is down, obviously. China is not going to be completely decoupled from that. We have already seen China's economy decline. In particular, China manufacturing is on the ropes as product orders from overseas continue to fall. This economic and manufacturing decline is negatively impacting the Chinese consumer. We can debate by how much, but it has to be having a negative impact, it just has to. Foreign buyers who a year or so ago would have rushed into China real estate at any sign of a loosening of foreign buyer restrictions are cash and credit poor now and far more wary. Leading buying countries like Singapore, Taiwan, and Hong Kong (I know it is technically a part of China) are hurting. k98My firm's clients who a year ago would nearly always ask me about what it would take for them to buy "something" in China, virtually never bring that up any more. From where is the demand going to come that is going to support/raise China real estate prices in 2009? I just do not see it. Do you?

Full post as published by China Law Blog on January 27, 2009 (boomark / email).