China Real Estate Investing Stands to Benefit from Stimulus Package

I spent a fair amount of time in Southeast Asia in the late 80s and early 90s. I lived for about 3 years in Hong Kong as well as 1 year in Taiwan. And naturally, I always had an eye on China's "mainland."

Believe it or not, most Hong Kong residents had embraced the change from England's colonial rule to China's "one-country-two-governments" promise. Call it cultural pride... call it "white ghost" fatigue. The fact of the matter was that folks in Hong Kong weren't as fearful about China's new government as an outsider might have been led to think.

One very big reason? Many HK residents were certain that they were going to get rich quickly. Hong Kong was one of the world's largest examples of thriving capitalism. Scores of mainland workers were expected to arrive in Hong Kong. And real estate speculators had been bidding up values in 1993, 1994, 1995, 1996, 1997.

When China took the reins of Hong Kong in 1997, scores of workers did NOT cross the former borders into the popular port city. Instead, they went to Shanghai and/or other "economic zones." Property values in Hong Kong fell 50% overnight and they've never come close to reaching their former highs.

In contrast, China property values in places like Shanghai, even Beijing, soared. Granted, values took a huge hit after the 2008 Olympics. But many analysts are expecting property development to kick back into a high gear shortly.

Enter one possibility: the Claymore/AlphaShares China Real Estate Fund (TAO).

Claymore's timing for the release of TAO could not have been much worse. In the year December 2007 when TAO first began to trade until November 2008 (circa the credit crisis bottom), TAO lost more than 65% in value. The Vanguard REIT Fund (VNQ) for U.S. real estate investment trusts also fell 60%+, but it took longer for the Vanguard REIT Fund (VNQ) to troll those depths.

But things can change in the blink of an eye! The Claymore/AlphaShares China Real Estate Fund (TAO) is nearly 50% higher off its lows, while U.S. REITs are still unsure of their direction.

True, it may be tempting to say that this means little in the context of recovering losses. One might also note that the fundamentals for Hong Kong based property developers working on the mainland are strong.

The Claymore/AlphaShares China Real Estate Fund (TAO) tracks an index that measures the performance of publicly-traded companies and real estate investment trusts ("REITs") which are open to foreign ownership and derive a majority of their revenues from real estate development, management and/or ownership of property in China. The 40 companies in the index have an average P/E of 10.5 and an average P/B of 1.

The distribution yield is annual and it doesn't appear to be particularly exceptional. The yield may be slightly north of 3%.

Nevertheless, the potential wisdom in using TAO may be in the notion that China is spending a great deal on infrastructure. The companies in the Claymore/AlphaShares China Real Estate Fund (TAO) are fairly well-established developers, and they stand to benefit from China's stimulus package.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Phiota:]

As an expat living in China what worries me (from purchasing real estate directly or purchasing a real estate fund) is the ratio between residential rental rates and purchase cost in China. It is much higher ratio then what is in the US or rest of the world.

John

Apr 08 07:21 AM

[rlirph:]

Are you referring to the rate of return? Here in Guangzhou you can reasonably expect a realistic 4-5% annual return on your investment. In China tenants also pay for the association fees and all their utilities as well.


On Apr 08 07:21 AM Phiota wrote:

> As an expat living in China what worries me (from purchasing real
> estate directly or purchasing a real estate fund) is the ratio between
> residential rental rates and purchase cost in China. It is much
> higher ratio then what is in the US or rest of the world.
>
> John

Apr 08 10:31 AM

[huangthomas:]

In China, all lands are owned by the government. You can only lease the land to build houses. Pay for the right to use the land is expensive, because the government have monopoly and leasing land out is a major source of funding for the local government. For the next tier of potential house buyers, the affordability become a problem. In addition, over-building is a problem too. In essence, there was a small bubble in Chinese housing market in the past.

In Hong Kong, lands are auctioned off to the private parties. Hong Kong always has restriction of Chinese moving into Hong Kong. No one expect 1.3 billion Chinese can freely move into Hong Kong.

Apr 08 10:46 AM

[Mad Hedge F...:]

Prologis will take advantage of this. Jeffrey Schwartz, for the former CEO of the global logistics and warehouse firm Prologis (PLD) is not looking for a quick recovery of the economy, and sees a lot more pain for his industry. The firm suffered a near death experience last year and was only able to extricate itself with the sale of some Asian assets. Prologis is the world’s largest developer of commercial warehouse space, and a leading manager of REIT’s. The Denver based company employs 1,500, managing 2,898 properties, totaling 548 million square feet in 115 countries. It had been a highly leveraged call on the growth of international trade, which is now imploding with unprecedented speed. PLD’s growth focus is still on China, where it has 38 million square feet of space, and land commitments to double that. It is investing $1 billion there over the next two years, counting on a government commitment to support the logistics sector. Investors certainly believe it. The stock has roared 57% in the last ten days. The company has announced that it is using the rally to issue new shares to wisely reduce its insanely high levels of debt. This will dilute existing shareholders by 50%, but hey, half of something is better than nothing, isn’t it?

Apr 08 11:23 AM