Chinese Real Estate: Getting in on the Next Bubble

Recent inputs regarding investor interest in Shanghai property shows it’s again running very high. There are some key structural reasons this is probably a good time to be considering taking some positions here:

1. The Chinese are now making it easier to buy property. A recent offering calls for investors to come up with a 30% downpayment to receive a 4% loan for the remaining 70%. The 3% deed tax and 0.05% stamp duty is now very low. The capital gain tax has been reduced (for resales within 2 years) to 5% of the gain versus what had been 5% of the entire amount.
2. Recent policy changes to allow the local currency to appreciate gradually adds an additional kicker to returns to external investors that makes this even more attractive. Although exchange rates are unpredictable, most feel that the RMB has been kept down structurally and will tend to trend up over time versus other major currencies.

Caution on China is always a good idea and we know that there is still inventory to be worked off in a number of major cities there. However the global investor appetite for this asset class looks like it will be aided and abetted by changes in deal terms and exchange rates.

Many investors have gone to China or Hong Kong to cash in this trend over the last decade or so. Those of us wanting to exploit this trend in a less wholehearted way might look to the new Claymore China Real Estate ETF (TAO) for a simple way to have exposure. We can’t speak to the quality of this ETF but in a market offering few such choices this one is at least available.

Disclosure: At the time of this writing we hold a few shares of TAO in our own and managed accounts.

Comments

[jimrogersfan]

Good points you made. Unfortunately, the TAO appears to mirror the Chinese market (FXI). No Alpha compared to the Chinese Beta. Might as well stick with FXI especially when you consider FXI trades over 400x the volume of TAO, has the same yield and a lower P/E

2009 Jun 21 09:53 AM

[Rhunzzz]

Stock bubbles lead to lots of money wasted. Real estate bubbles lead to death and destruction. Reading this makes me even more leery of China.

2009 Jun 21 11:22 AM

[Moothu]

If interested in chinese real estate play EJ housing (EJ) is a good way to play....it is currently skyrocketing.

2009 Jun 21 12:25 PM

[snagglesnarf]

Chinese stimulus lending is pumping billions into the economy without much vetting. It's all just another growing bubble.

2009 Jun 21 07:32 PM

[RiskReturnOptimizer]

Monitor developments in Taiwan to determine next big move for TAO. Once Taiwan opens up its property market (first commercial, then residential real estate) to Hong Kong / China money, expect huge move in property development companies traded in HK.

TAO will benefit greatly, more so than FXI during the next leg of Chaiwan cooperation. Meanwhile, TAO is playing on low interest rates in HK, which will stay low for a while (as it's often linked to US interest rates to maintain currency peg of HK$:US$).

2009 Jun 21 08:54 PM

[Seawave]

Agree with User 93369. EJ can be a better play than TAO for these reasons:
1. EJ brokerage and real estate consulting businesses are somewhat more shielded from any oversupply situation.
2. The governement's more favorable attitude toward real estate investment will surely generate more transactions, regardless of demand / supply balance of specific regional market.
3. It's a market leader in the borkerage biz.
4. Finally, as the population (which obviously is huge) get wealthier to afford homes (new or upgrade), it will create a long sustainable growth trend.
The downside if any is the share price has run up quite a bit in the past few months. However, I believe it will still bring a very solid return for medium to long-term investors.

2009 Jun 21 11:50 PM

[Alan Young]

I don't think this comment is accurate. Since the March bottom, FXi is up 50%, but TAO is up 100%. That's twice the beta!! Either an opportunity (in a bull market) or a danger. But hardly an equivalent.


On Jun 21 09:53 AM jimrogersfan wrote:

> Good points you made. Unfortunately, the TAO appears to mirror the
> Chinese market (seekingalpha.com/symbo...). No Alpha compared
> to the Chinese Beta. Might as well stick with FXI especially when
> you consider FXI trades over 400x the volume of TAO, has the same
> yield and a lower P/E

2009 Jun 22 02:47 PM