As active investors in China since 2006, we have witnessed unprecedented economic growth. When we started, China represented less than 20 percent of US GDP. Today, China’s GDP is over 60 percent of the US economy. Over this nine-year period, we have also witnessed incredible growth in the real estate markets, as well as the evolution of a growing middle-income, residential real estate market. One of the most important things we’ve learned along the way is that China is not one single market. Like the US, it has hundreds of individual markets and sub-markets, each with distinctive characteristics. Property prices and market fundamentals in China vary between markets and the differences can be as vast as those between San Francisco and Dallas.
So what’s really going on in the Chinese residential market? China is now the second largest economy in the world, yet its residential real estate market is a mere 17 years old. Over the past 30 years, China has seen its urban population grow from a single digit percentage to approximately 55 percent today, with over 15 million people per year moving from rural to urban areas. Over the same period, China’s middle class went from being non-existent to representing over 50 percent of its vast population.
The growth of the urban middle class has created a never before seen demand for housing. With a growing economy, rising wages, and a high savings rate, one of the first things new members of the Chinese middle class want to buy is a home – much like the booming American middle class did in the post-war era of the 1950’s.
High residential demand leads to high growth rates for both sales volume and pricing, which have had annual average growth rates of 11.1 percent and 8.8 percent respectively, over the past eight years. These numbers may seem surprising to some Westerners. However, it’s important to know that over the past decade, disposable income growth has consistently outpaced housing price growth in China, and that only about 25 percent of the capital in the Chinese real estate market is debt and 75 percent is equity. From our perspective, this is the basis for a steady and solid market that, like all markets, will experience year-to-year corrections but maintain a steady trajectory over the longer term.
In fact, the Chinese residential market recently experienced a correction, as both sales volumes and pricing declined in 2014. To put this in perspective, 2013 was a record year, so while sales volumes declined around 10 percent in 2014, they were still 10 percent higher than 2012, the previous record year. Corrections like this occur in all markets and China is no different. The key is to see the numbers in a historical context and recognize that this is simply a healthy market correction.
Success in China is dependent upon the same factors that determine success in other markets. Any investment strategy should be tailored to the local market, so that it appropriately addresses the unique cultural and economic elements of that market. In real estate, this also means that cultural factors must be taken in to account. For example, middle-income buyers in China typically place a premium on proximity to amenities, including transportation, schools, medical facilities and shopping. Quality construction and design are also important to Chinese homebuyers. Understanding how to address these needs in China requires significant local knowledge that can only be gained from a long-term, local presence.
In addition to creating the right strategy, selecting the right local partners is as important in China as it is in other markets. That being said, identifying partners in China requires first-hand knowledge of the market players. Sorting through the 50,000 plus real estate developers to build relationships with the best players is a significant task that can take years. Once again, this can only be achieved with a local presence.
From our perspective, the bottom line for investment success in China’s real estate markets comes down to commitment. The complexities and cultural nuances of China require investors to invest time and effort long before they invest their capital. That means that a successful Chinese investment strategy could take many years to devise and implement. Investors must be committed, recognizing that while the real estate markets may experience temporary ups and downs, the long-term trajectory for China is positive.