International Law

China's Property Bubble. Bad For Business?

By Dan

China's major city property prices have been going really crazy of late, after having gone just crazy for years. As one would expect, there are two camps regarding China real estate. There are those who see it as a bubble that can and will pop any day now and there are those who say prices are just playing catch up and there is plenty of value to be had. It seems the bubble argument has been gaining steam of late and I tend towards that view as well. For an excellent exposition of that view, check out, "Just how risky are China's housing markets?" 

This is NOT going to be a post about where China real estate prices are heading as I am not a fan of economic predicting, especially by me, a non-economist. As Lau Tzu is said to have said, 'Those who have knowledge, don't predict. Those who predict, don't have knowledge.'

No, this is going to be on how China's current prices are bad for business. All I know is that for the third time this year, a very well-funded client of my firm has decided against moving forward in China due almost solely to China real estate prices.  Here are the three cases:

1. Venture capital backed premium fast food chain had big plans to go into China but backed out when they simply could not find good spaces in Beijing or even Qingdao at a price low enough to allow them to price their menu at their target prices and still eventually become profitable. The head of this project asked me at one point if I thought any of the newer foreign retailers/restaurants were making money in China. 

2. Retail client with three profitable stores in China told me that it has put its expansion on hold because present retail lease rates would be so high on any new stores, they would not be profitable. Their plans are to "wait out the bubble" and then look again.  

3. Industrial client who started their research about going into China around six months ago, just last week determined not to go in because of rising property prices and wages.  

I understand that prices cannot stay low forever, but have China's real estate prices risen so far so fast that they are beginning to choke off business? And if so, is this the reason why the Chinese government will let them or even encourage them to fall?  

What are you seeing out there? Have you frozen a project that was a sure thing until property prices squelched it?

For an excellent analysis of how retailers should handle China's sky-high retail leasing rates, check out, "The Basics On China Retail -- Creating Your Own Customers Is The Key," and, in particular, the section entitled, "Look pretty in Tier 1 cities, make money in Tier 2 and 3." 

Full post as published by China Law Blog on August 01, 2010 (boomark / email).