Partners Group fears pricing correction in Tier I China

In its latest global research document, the Zug-based alternatives investor sides with those who believe China’s tier one cities are in danger of overheating.


Partners Group, the Swiss-based alternatives investor with more than €20 billion of assets under management, has taken its position in the debate about whether the real estate investment markets of China’s tier one cities are overheating.

“We side with those who are concerned about the potential for a correction in both the residential and commercial sectors in the eastern region of the country,” the firm said in its Private Markets Navigator research document for first half 2011.

Government measures to curb investment into cities such as Shanghai and Beijing over the past couple of years in an attempt to stem rapidly increasing prices have prompted many market participants to debate the inflation of market bubbles. In some cities, particularly in the residential sector, prices have risen by more than 70 percent since 2007. Partners Group argued such increases are unsustainable despite contrary arguments from other market participants suggesting such hikes reflect more than 30 years of pent up demand, more than capable of supporting such continued demand.

The firm said: “The fundamental question is whether a major price correction will occur and what its consequences might be. It would appear that a price correction in the residential sector is more likely than not given its share as a percentage of GDP.”

Partners admitted however that a pricing fall in China would not likely have the same devastating effect as it did in the US where homeowners borrowed substantially more to acquire their homes. “Housing prices in the US declined approximately 25 percent from peak to trough in the recent housing correction. The price decline effectively wiped out homeowner equity. A similar decline in China would not have the same effect due to significantly lower leverage ratios of the local Chinese investors.”

On the commercial side, Partners Group raised concerns about the amount of available space coming to market. In Beijing, it said 18.9 percent of existing office stock was expected to come to market in the next 12 months while Shanghai is expected to “double its inventory” despite an estimated current vacancy rate of about 15 percent. Doubting projections by brokerage firms of rental increases, Partners said such cities were not displaying the real estate fundamentals to support such claims: “Notwithstanding the overall strong GDP growth rate of the country, we think the market may be out over its skies in terms of the time it will take to absorb this entire new inventory in the short run,” the firm said.

Partners’ view was supported by participants at the PERE Forum: Asia conference in Hong Kong last week. Mark Burton, former chief investment officer of Abu Dhabi sovereign wealth funds said in an on-stage interview the notion that capital rates in Shanghai were lower than in London and New York was “ in my opinion, dotty”. Other China focused participants such as Goodwin Gaw, founder of Gaw Capital and Stanley Ching, chief executive officer of CITIC Capital explained their strategies had migrated from China’s tier I cities to second and third tier cities where the opportunities for high returns were more plentiful.

Like Gaw and CITIC, Partners Group was more bullish on its tier II and tier III cities. Exemplifying cities like Chengdu and Chongqing, Partners said it was important to understand China is not homogenous. “The performance of Beijing is most likely not reflective of interior cities that have very different supply/demand ratios because recent capital flows have been to the more ‘glamour’ cities in the east.”