Driven by a boom in real estate prices, and the ever rising expectations of China's middle and wealthy classes, there has been an unprecedented surge in construction that can be felt on the other side of the world.
In fact, China has been consuming so much cement – roughly half of the world's supply – that builders as far away as Florida complain of delivery delays and rising prices. Naming their creations Palatial Court, Billionaire Mansions and Tycoon Heights, developers have been battling to outdo each other in terms of wild designs. And with prices often topping well over US$1 million a unit, these sprawling developments represent the pinnacle of China's fast-growing obsession with real estate.
Such pastel-shaded palaces might not be to everyone's taste, but with the rise of China's nouveau riche, ostentation is what screams success. And it's not just castles for China's new breed of millionaire entrepreneurs that are being built.
With economic growth and rising wages, millions of Chinese further down the ladder are also making moves to realize the dream of home ownership, pushing up demand – and prices – for residential property.
First half rise
In the first half of 2004 residential property prices nationwide grew on average by 12.9% year-on-year, according to official statistics; while in six regions, including Gansu, Jiangxi and Tianjin, growth exceeded 20%.
Richard David, CEO of First Property Group in Shanghai, says this is fundamentally the effect of an easing of economic regulations and a growth in earnings, which has only recently made home ownership a viable possibility.
"What we are seeing is a market that has really only had any semblance of commerciality to it for the past five or six years," he said.
"Today there are any number of banks offering home mortgage services, you can get a 30-year loan, and your loan-to-value ratio can be as high as 80% – conditions that were unheard of just a few years ago."
It is this newly unleashed buying power, David said, that forms the cornerstone of growth in China's property market.
In the commercial sector as well, demand for office, commercial and industrial real estate has also soared in recent years – both in the established economic powerhouses of Shanghai, Guangzhou and Shenzhen, and upcoming regional centers such as Chongqing.
But it is the residential sector that dominates China's real estate market, with one of the biggest motivators being the government-backed program of urbanization. According to official projections China's cities are expected to grow by more than 12 million a year up to the year 2050.
That will take the urban population rate from just under 40% now, up to 60% by 2020, eventually adding more than 600 million to the urban population by the middle of the century. This is not an estimate, but policy. And with so many new urban arrivals on the cards one certainty is that there will be a steady demand for new homes. According to Macquarie Real Estate Asia, accelerated urbanization will translate into a need for another 200,000 new units every year for the next 10 years – in Shanghai alone.
Added to that, governments at both the central and local level have been looking to increase the amount of living space per person. "In Shanghai, for example, the government is trying to increase the amount of space per person by 3 or 4 square meters," said Andrew Slevin of property consultant Chesterton Petty Ltd. "That adds up to an awful lot of newly-built areas."
Some 1,500 kilometers inland, in western Chongqing, recent government-backed investment aimed at transforming the city into a regional economic hub has also brought a surge in construction and real estate prices. At a real estate fair held in the city earlier this year, for example, the average trading price per square meter was US$374.39, up by US$77.53 from 2003, a year-on-year rise of 26.1%.
Of course, there is another factor driving demand: the paucity of investment options. The stock market has been lackluster to put it mildly and low deposit rates would normally get investors exploring mutual funds, except for the fact there hardly are any.
"Deposit rates are very low, while inflation is on the rise, so if you keep your money in the bank it is effectively devalued," said Andy Xie, chief Asia-Pacific economist for Morgan Stanley in Hong Kong. The property market, with its steadily rising prices, offered one of the few outlets for wealth preservation, he said.
"Ten years ago Chinese people bought refrigerators for wealth preservation," Xie said. "Now they're doing the same thing with property and that's exaggerated demand." According to a recent report by Jones Lang LaSalle, for example, 21.1% of China's newly rich urban citizens – about 15 million individuals – said they preferred to invest in real estate rather than in bank savings or invest in the stock market.
Indeed, many of the new Chinese millionaires targeted by the US$1 million-plus villa complexes sprouting across the country have themselves made their fortunes in real estate. In June 2003, to take one of the better known examples, the German-made Maybach automobile saw its official launch on the Chinese market, retailing for around US$90,000 a car. Their first customer, paying cash, was a 27-year-old real estate tycoon from Shenzhen.
Chesterton Petty's Andrew Slevin argues these high-profile spenders have created the impression among many investors that putting money in real estate is a "safe play."
"In some cases, particularly in the past three or four years, people have seen it as easy money – you can buy anything and you can make money on it. There's no risk perception," he said.
"I talk to people about interest rates and they look blankly at me when I say 'they can also go up – they don't always go down,'" Slevin added. "So you're talking about a still very immature and inexperienced investor class."
Slevin pointed to another worrying feature of the market: increased buying and selling of property as a commodity without that property ever actually being occupied, bringing with it the risk that, as with any commodity, supply can exceed demand and prices can fall sharply in a wink.
So what about all this talk of a bubble?
The fallout from a burst could be widespread, not least with China's beleaguered banks, which are already saddled with large numbers of bad loans. But there is a wide range of opinions on whether a bubble actually exists.
Lots of people, no money
Morgan Stanley's Andy Xie places himself distinctly in the pessimist's camp. With a growing number of investors putting their money in property, he said, prices are becoming increasingly exaggerated, attracting speculators who are pushing prices up yet further to levels that are simply unsustainable.
The difference with China's property market, he said, is that it is driven by the primary market, the sale of newly-built properties. "A secondary market bubble doesn't need a lot of new money to keep going, because I buy from you, you buy from me, and the money stays in the system," Xie explained.
"But in a primary market situation, you always need more money to feed it, so that's why it doesn't last very long. I think a price correction is inevitable, and it's probably going to be pretty big."
But what of the millions of new arrivals, heading to the cities and looking to set up home? Simple, said Xie: "They don't have any money." Certainly there will be demand for housing, he said, but the actual capability to buy simply doesn't exist. Taking the view that new arrivals equal new demand is, said Xie, "a need-based argument."
Others are more optimistic, though they concede some fundamental market weaknesses need to be addressed. For Chesterton Petty's Slevin, the biggest issue now is whether demand for real estate will slip if the government is true to its word and slows GDP growth to around 7%. "That's fine, if it stays stable," he said. "But then there's the question – if it goes below 7% – of whether there will be enough GDP growth to sustain the development of businesses. "Fundamentally, how do people afford homes or afford to pay for rentals in offices? It's through the growth in their businesses and growth in income, and if that growth isn't there you begin to have question marks."
Overall, though, Slevin is increasingly optimistic about the market outlook. "A year ago I was forecasting doom and gloom," he said. "But today I've changed my mind, partly because I think there's enough demand from local owners to upgrade, and enough people have made money in the property market to actually be able to afford to do so."
Richard David of First China Property goes farther, rejecting the possibility of a bubble bursting in terms of either supply or over-investment.
Rather than any worries of an oversupply bubble, government moves to put the brakes on excessive borrowing will, at least temporarily, actually lead to a shortfall in property supply, he said.
Discouraging bank debt
That appears to be especially the case in the middle- and low-end sectors, Slevin said. "What the government has been trying to do is make the market more efficient by making it less reliant on bank debt," David said. "You might argue that, if the government had let it continue the way it had been funded – that is 100% from bank debt – then there might have been an investment bubble. But they've now nipped that in the bud."
As a result, developers have had to search elsewhere for capital, many of them now turning increasingly to foreign investment funds previously ignored when bank loans and cheap credit were easily available.
"In the property market, what the government has been trying to do is make the market more efficient by making it less reliant on bank debt," David said.
"So if you're big and you've got access to capital, then there's no concern for you in this property market."
If you believe the optimists, perhaps the only bubbles bursting will be in the champagne glasses at Tycoon Court – for the time being, anyway.