Overview

China’s real estate market tops the world in terms of market demand. In 1998, the scale of real estate development totaled 5.4 billion square feet, driving up national GDP by at least one percent. Since then, the economic scale has continued to expand, reaching 7.5 billion to 8.6 billion square feet each year.

The annual scale of real estate development is similar to all of Europe. Moreover, the population of China has continued to grow and is not expected to stabilize until it reaches 1.5 billion people in about 20 years. Of China’s 1.3 billion people now, rural residents comprise 0.8 billion. China’s “urbanization ratio” (percentage of population who live in metropolitan areas) is no more than three percent, far lower than the 70 to 80 percent in developed nations. The urbanization ratio is anticipated to rise by one percent annually with 0.5 billion farmers expected to become city residents over the next two decades, stimulating massive construction of urban residential buildings. No other country has such tremendous and sustainable real estate market demand.

Some large-sized real estate enterprises in China have achieved the development scale of 14-16.1 million square feet, ranking them among world-class companies. It is expected that their development scale will total 43-53 million square feet by 2016. Due to China’s huge development scale, digital technology will play a significant role and undergo rapid growth. Since China has a major market for “smart” residences, the foreign real estate industry is expected to gravitate to China for this expertise.

Total Real Estate Investment, Prices and Growth
From January through September 2006, investment in completed office buildings totaled $7.65 billion, a growth of 15.8 percent over the same period in 2005. Investment in other completed commercial and business properties totaled $20.4 billion, a rise of 16.9 percent over the same period in 2005. Nationwide, investment in office buildings and other commercial and business properties accounted respectively for 4.7 percent and 11.9 percent of all real estate development.

Real estate development investment totaled $101.5 billion in the first half of 2006, a growth of 24.2 percent. Investment in affordable housing reached $1.96 billion in the first five months of 2006, a three percent rise over 2005 while investment in “commodity housing” (individually owned, non-government built residences) rose 25.4 percent. In 2002, China lifted all barriers to foreign investment, although some have since been applied in individual cities or regions.

During the third quarter of 2006, land prices in major Chinese cities reached a general level of $212 per square foot, while commercial, residential and industrial land prices grew about one percent higher than a year earlier. The cities of Xiamen, Hangzhou and Shanghai had the highest land prices while Xiamen, Shaoxing and Fuzhou had the fastest growth in land prices (5.58 percent to 20 percent). From January to August 2006, completed real estate investment totaled $161.3 billion, a rise of 28.1 percent while commodity residential housing prices nationwide grew by 7.1 percent. Land prices accounted for 20-40 percent of housing pricings in many cities.

The largest growth rates occurred in Central China (+36.3 percent) and Western China (+32.1 percent), with Inner Mongolia and Tibet experiencing over 100 percent growth over 2005. Real estate developers raised over $80.3 billion for businesses, and foreign funding reached almost $3.43 billion. The commercial property market of Shanghai, China’s business hub, grew over 41 percent in the first seven months of 2006 alone. In May 2006, the government reduced the required area of small dwellings to 969 square feet in about 70 percent of residential projects and regulated down payments for new houses. This is one of 10 new government real estate policies, including taxation measures and confiscation of land if it is not developed within two years of purchase. These policies have led to a housing boom but also an 11.7 percent vacancy rate nationwide.

Top Real Estate Companies
Although the number of real estate companies in China has reached 37,000, they are all small-sized companies, with average assets totalling only $14.39 million. The average assets of the Top 10 listed real estate companies together totalled only $791.4 million. Individual foreign developers claim net assets of several hundred million and in some cases several billion USD.

The top Chinese real estate firms according to various measures are: Vanke Group, China Oversees Land & Investment Ltd, Beijing Capital Development Holding (Group), Hopson Development Holdings, Shanghai Shangsi (Group), and Beijing Sunshine 100 Co.

In terms of market share, the Top 10 real estate developers in Shanghai and Shenzhen have a market share of 23 percent and 20 percent respectively, while the top nine real estate developers in Hong Kong claim a market share of up to 80 percent. Vanke has a market share of only 0.94 percent nationwide, while the top three real estate companies in the U.S. claim a market share of up to 45 percent.

Company Models
Chinese real estate companies have adopted various models including highly centralized management structures with large-scale duplication in suburban settings (the “Wal-Mart” approach); region-focused enterprises selling businesses, offices, hotels and residences; and single offices focusing only on luxury housing. Other companies focus primarily on land sales. Foreign real estate firms largely form alliances with local Chinese companies.

Challenges
Besides their small size and learning curve, factors constraining growth include a shortage of top real estate talent, the absence of qualified property management teams, an inadequate supply of credit and underdevelopment of property management.

The service level of Chinese real estate agencies lags far behind international standards. Property appraisers, for example, are sorely lacking. Architectural design institutes do environmental planning and housing designs, but these do not align with real consumer preferences. However, large, foreign companies with their financial resources, advanced management and first-class technology can fill some of these gaps including property and mortgage insurance as well as loans.

Excerpted from “China Real Estate Market Investment Analysis Report 2006.”

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