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As its economy changes, China is starting to export its real estate ideas too

As its economy changes, China is starting to export its real estate ideas too

When it comes to discussions about Chinese real estate investors, we tend to focus on the idea that they are buying up property in places like Australia, pushing up prices – even if that is somewhat questionable. But it also ignores the other side of the equation. The number of properties built by Chinese developers outside of China has grown significantly, even as residential construction within China slows.

The expansion of Chinese residential development outside China has impacts on a number of levels, from property prices through to regional diplomacy.

The shift to Asia

Country Garden, a property development company based in Guangdong, China, is constructing apartment buildings that would add more than half-a-million homes and house 700,000 people in Johor Bahru, in southern Malaysia. This project goes far beyond constructing apartment buildings, however. It is part of an even bigger project named “Forest City” that Country Garden plans to build on four artificial islands.

The idea is that Forest City will be equipped with schools, shopping malls, parks, hotels, office buildings and banks. All ensconced in rich greenery, clean water and a quiet transportation system.

This grand project is just one example of the recent surge of overseas investment by Chinese property developers. Total investment in the Chinese real estate sector was growing at a rate above 10% until 2014, then dropped to less than 1% in 2015. This indicates a significant shift in Chinese real estate investment.

All the while, Chinese investment in the real estate sector overseas has picked up strongly. It has grown from $US0.6 billion in 2009 to US$30 billion in 2015. Several Chinese property developers have identified overseas investment as their main business growth strategy.

Two reasons for the pivot

Chinese investors have begun looking offshore for a couple of reasons.

Chinese buyer demand for overseas properties is growing. Since China reformed its economy and started growing at a fantastic rate, households have accumulated significant wealth. They now want to diversify their investment portfolios, and so are seeking property elsewhere.

Volatility in domestic housing prices has intensified this trend, despite various government policies aimed at smoothing out price fluctuations. An oversupply of properties in third and fourth-tier cities such as Ordos and Qinhuangdao created “ghost towns” where property isn’t desirable. In first and second-tier cities, however, prices have skyrocketed. House price-to-income ratios of these cities are ranked highest in the world, making it difficult to invest in properties in China.

In recent years there has been a huge expansion of production capacity. In 2015, China produced 51.3% of the cement and 49.5% of the crude steel in the world. As production capacity grows beyond the demand from the domestic market and runs into overcapacity, it is natural that firms will seek returns overseas.

 

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