This article was originally published in Summer 2019.
With so many factors to consider, the division between doomsayers and optimists has never been so large.
There seems to have always been two starkly different perspectives about China’s real estate market. For years, doomsayers have warned of an impending ‘burst of the bubble’ and ‘hard landing’, while the optimistic prefer to cite the long-term growth potential generated by the sheer size of the 1.4bn population and a continuing urbanization that is expected to last for at least another 20 to 30 years.
The division between these two trenches has never been as fierce as recently, when the uncertainty of the country’s future growth became exacerbated by trade tensions and China’s GDP in 2018 notched in at 6.5%, its lowest level since 1990.
To better understand China’s real estate market, it is critical to note some unique characteristics. First, China’s vast size, various geographic locations and imbalanced regional development have led to many differentiated and fragmented submarkets. A total of 660 cities and towns are categorised into six different tiers based on overall real estate transaction volumes, prices, quality and trends in residential real estate assets. For example, the average housing sales in the city proper of Shanghai, one of the four first-tier cities in China, is roughly RMB 8,500 per square meter, while the price in Zhengzhou, a third-tier city in the provincial capital of He’Nan province, costs only RMB 2,000 per square meter – less than a quarter of the price in Shanghai.
Moreover, in China, the dichotomy of land-use rights between urban and rural areas, the absence of a nationwide, annual property tax, and the allocation of tax distribution between the central and local governments, have all rendered its urbanization based on a unique land-financing system that forms the country’s fundamental mechanism for rapid urban growth.
Given the role of the government in China and the absence of existing theories and practices suitable for guiding and regulating its real estate markets, experimental interventions from the Chinese government are often carried out and applied in a trial-and-error manner. New policies are often tested or applied in one or two cities. Only if the outcome is favourable are the policies then evaluated at a regional level, before application at a national scope. This ‘pragmatic experimentalism’ is at times conducive to the market and, at other times, has generated unexpected results – even backfired.
As real estate is located at the intersection between physical property and capital markets, given China’s transitional economic conditions, international and domestic capital markets often have profound impacts on the developmental stages of its real estate market and the corresponding performance. Although the growing middle class and less developed domestic capital markets in China have led to concentrated investments by retail investors in residential real estate, the globalisation of the network for capital markets has impacted the flow of capital from global institutional investors in the commercial real estate scene of major Chinese cities.
China’s mixed-market structure reveals the pragmatism imbedded in the business and economic environment throughout China’s reform era. Real estate companies take on various organisational forms, including, for example, as private business, state-owned real estate development enterprises, public real estate companies listed on domestic or international stock exchanges, and even entities that are listed simultaneously in multiple exchanges both within and outside China.
Lastly, the complexity of China’s real estate market often leads us to forget that real estate in China is still a young industry, with merely 40 years of history. The institutional infrastructure facilitating the development of the real estate industry is still in its infancy and needs to continue to form. For example, a formalised real estate investment trust and real estate asset-back securitisation market is still absent and remains at the discussion stage. In fact, there has not been much progress over many years in this area.
Part of the article is an excerpt from Bing Wang’s forthcoming book Understanding China’s Real Estate Markets – Development, Finance and Investment.
