June 22, 2010, 10:49 PM EDT
By Kathleen Chu
June 23 (Bloomberg) -- China’s housing market is not in a bubble and economic expansion and urbanization will support gains in property prices in the long term, UBS Global Asset Management and ING Real Estate Investment Management said.
Economic growth will underpin the market even amid concern that a bubble has formed in first-tier cities and some second- tier ones, Lijian Chen, head of global real estate for Greater China at UBS Global Asset Management, told a property conference in Singapore yesterday.
The Chinese government has introduced measures to rein in record price gains, including a ban on loans for third-home purchases, higher mortgage rates and down-payment requirements for second homes. Real-estate prices jumped 12.4 percent across 70 cities in May, after a 12.8 percent surge in April that was the most since the data series began in 2005.
“The market is not suffering from a bubble,” said Richard Van Den Berg, managing director at ING Real Estate, a global fund manager with about $87.7 billion of assets. “There are price corrections going to take place in primary cities. In secondary cities, because of government measures, there will be a bit of cooling off, lower volume, and wait and see. In principal, the market is very, very healthy.”
The country’s economy expanded 11.9 percent in the first quarter, the fastest pace in almost three years, boosted by Premier Wen Jiabao’s $586 billion stimulus package. The World Bank, in an economic outlook published June 9, forecast 9.5 percent GDP growth for the year.
Hot Market
“At the end of the day, the real estate market will continue to grow,” said UBS’s Chen. “The economy will grow at 10 percent and that will translate into income growth.”
UBS Global Asset Management, a division of UBS AG, Switzerland’s biggest bank, invested $560 billion in assets as of March 2010.
China overtook Hong Kong as the world’s hottest housing market in the first quarter, with prices rising at more than double the rate of anywhere else, property adviser Knight Frank LLP said June 17.
China’s retail and residential properties remain the top desired investments for the three years ending 2012, according to a survey of 75 investors and fund managers this year by Hong Kong-based Anrev, a non-for-profit organization.
UBS’s and ING’s optimism contrasts with Nomura Holdings Inc. The “bubble” in China’s property market is going to burst very quickly, with prices set to fall as much as 20 percent in the next 12 to 18 months, Sun Mingchun, a Hong Kong-based economist at Nomura, said in a Bloomberg Television interview on June 16.
No Bubble
Stephen Roach, chairman of Morgan Stanley Asia Ltd., said the government’s measures are working “by all accounts.” China’s property boom isn’t a bubble because it’s supported by “solid” demand for residential housing, he said in a radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance.
There is demand for ING Real Estate’s residential projects in second-tier cities in China, despite the government’s cooling measures, said Van Den Berg. About 20 percent of buyers pay in cash, while the rest will borrow less than half the purchase price, he said.
Affordability and the level of borrowing are supporting second-tier cities, he said.
“Affordability in second-tier cities, not all, but most, is still extremely healthy, where you see between 20 to 30 percent of people’s disposable income is utilized for paying a mortgage,” he said, citing ING Real Estate’s research. “Leverage in China across the board is very low. The risk in regards to people not being able to fund their mortgage commitment is not very high. The backdrop is economic growth.”
Medium-Term Promise
While the government’s measures to curb real estate investment have created more uncertainties, there are opportunities in the long term, real estate fund managers such as Grosvenor, RREEF, and Morgan Stanley said at the Real Estate Investment World conference in Singapore.
“China holds a lot of promise in the medium and long term,” said Nicholas Loup, chief executive for the Asia-Pacific region at Grosvenor, an Edinburgh-based privately owned property group.
China is “going to be an attractive market in the long run, but at the moment, it feels a bit over-heated,” said Willem De Geus, a managing director of Morgan Stanley Real Estate Investment Management. “Nothing is easy in China.”
While it’s challenging to manage assets in China with some tenants in default, the nation looks more interesting than India because of the size of the economy, said Paul Keogh, chief investment officer for Asia-Pacific at RREEF, the real estate investment management business of Frankfurt-based Deutsche Bank AG, with about $54 billion in assets managed.
“China has emerged more rapidly over the last few years,” Keogh said. “From an economic perspective, infrastructure, urbanization, you’ve got GDP growth that’s three times more than what India is on a per-capita basis.”
--With assistance from Joyce Koh in Singapore. Editors: Andreea Papuc, Malcolm Scott.
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To contact the reporters on this story: Kathleen Chu in Tokyo at Kchu2@bloomberg.net
To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net
From Bloomberg Businessweek published on June 22, 2010, 10:49 PM EDT
