Monday, May 19, 2014

Real estate problems are limited in size – Mario Cavolo

Mario Cavolo
+Mario Cavolo 
Most media are hyping up the problems in China´s real estate, argues author Mario Cavolo on his website. Fortunately, he finds support in articles in the Wall Street Journal by Nicole Wong and in research of CLSA.

Mario Cavolo:
Problems in China’s real estate market are not broad-based. Much of the excess overbuilding is taking place in China.s 3rd tier cities, two of which I happened to visit myself in the past week, Jinghua and Huangshi. Both lovely cities of 2-3 million population with new development zones expanding a few years ahead of the game. Is this a reason for caution, a slow down? Sure. A catastrophe or collapse? Not even close, stop those silly media-hype notions.
Why? Let’s do some comparisons. In the U.S., the vacancy rate for such properties is 10%. In China it is a much higher 15% and Nicole’s team suspects it will rise to 20% in coming years, reflecting too much spending on property rather than other assets. But since we know that Chinese have far fewer other choices to invest compared to the west, I don’t view this as much of a surprise or red flag. Chinese view an 80sqm empty concrete hole with a long term view, much as a bar of gold. It is simply a store of assets. It sits there,  it may or may not become 100% occupied, it is not mortgaged to the hilt, it will be passed on to the children. Considering also, the deeply rooted behavior of Chinese married couples always starting their lives with their own newlyweds home purchased by the family, this should come as no surprise. Much of this behavior driven by core societal values, not speculative investment, giving us a far more sustainable view for the long term health of the real estate market. While lots of people in the west own stocks as a core asset, for example, few Chinese do. It is understood that Chinese stock exchanges and listed companies are far less reliable and transparent than their counterparts in the west, so they shy away from such risk and volatility.
Last year, new home purchases in China totaled 12% of GDP, double the 5.9% ratio found in the U.S. building boom of the 50’s. Why is this not a worry at all? Because there is no comparison between these two historical economic booms. Compared to the post world war U.S.boom the China expansion is ten times larger in scale, driven by a population of 300-400 million rising middle class. The U.S. boom in the 50’s was driven by a far smaller population during a time in the world in terms of technology and innovation which could easily be called ancient. Did we even have fax machines back then? If you consider the sheer massive scale of China’s expansion and urbanization in today’s world the numbers can be recognized as far more reasonable than concern for disaster.
More on Mario Cavolo´s website.

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