Why the Fall of Syswin's IPO Underlines China's Realty Bubble

 |  Includes: ACH, CPSL, MAR, SYSW, TAO, XIN
by: World Market Pulse

As the famous Bob Marley line suggests, 'you can fool some people sometimes, but you can't fool all the people all the time'. The same is indeed happening in the Chinese realty sector. There is no denying the fact that although China appears to be a dream investment destination today, the ongoing rush to invest directly in China can turn out to be a real nightmare in the long term, especially in the hyped Chinese Real estate markets. As the world fights a deep recession, which is getting murkier by the day, much of the world’s global capital has been flocking to China in recent years in anticipation that China's growth can act as a protective shield. Although this investment route has worked well in the past year, now it seems like a perfect case of putting the cart before the horse. As China's inflated equity and real estate growth, built largely on government-led economic stimulus measures and soaring asset prices - which lead to low interest rates and massive fiscal deficits run out of steam, it's quite evident that the Chinese bubble is already on its way to bust - bringing an abrupt end to the boom.

The False Start Of SYSWIN: Shares of real estate consultant SYSWIN (NYSE:SYSW), which sells real estate services in 17 Chinese cities including Beijing, Tianjin, Qingdao and Jinan. opened flat with their initial public offering price, then fell as investors reversed course on a risky bet on China's red hot property sector.

The company managed to sell only 9.6 million American Depositary Shares for $7 each, raising about $67.2 million. The uncertainty in the Chinese realty sector as a whole also reflected this when SYSWIN changed the proposed size of its offering three times leading up to its IPO. The company first filed to raise up to $100 million, raised that amount to $123 million, then delayed its pricing by a day and cut the proposed value of its IPO by 41.5 percent.

Imminent Realty Price Correction: A recent Bloomberg report has quoted Beijing-based analysts at BNP Paribas as saying that China’s home prices will start declining from this month as the government maintains its lending curbs and increases the supply of public housing, forcing property developers to cut prices to boost sales. China’s property developers, the worst-performing group on the benchmark Shanghai Composite Index this year, will “continue to be affected” as the government maintains its curbs on the industry, the BNP analysts said. With the correction of the Chinese Real estate prices as projected by BNP Paribas, there are bound to be deep economic repercussions in China. Private housing investment accounted for around 15% of total investment volume in urban areas in 2008 and about 13% in 2009 while output in the home construction industry constitutes around 6% of China's GDP, employs around 14% of all workers in urban areas, and consumes around 40% of all steel and lumber produced in China. Hence, the slowdown in China's housing production or a significant house price decline on the household sector, is going to have a very direct impact on the China's economic growth.

The Chinese Infrastructure segment was helped by the easy money policy by the People’s Bank of China, the Chinese central bank. New bank lending in 2009 went up by 10 trillion renminbi, or around 29% of GDP. This was the biggest stimulus provided anywhere in the world and estimates suggest this government-directed investment was responsible for nearly 70% of China’s growth in 2008 and almost 90% growth in the first half of 2009. Since the beginning of this year, the Chinese government has directed banks to go slow on lending, on the concerns of there being a huge property bubble. But the price rise has continued unabated. In the month of April, property prices in China shot up by around 12.8% on an average. The Shanghai Composite Index of stocks jumped 80 percent last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009. China’s 2009 boom, in which automakers sold nearly 14 million cars and trucks, and housing prices doubled, is now being traced as a definite sign of an overheated economy, which now stands at a risk of serious recession in the coming months.

China Real Estate Related ADRs include:

Xinyuan Real Estate Company Ltd. (NYSE:XIN): Xinyuan Real Estate Co., Ltd. (Xinyuan) is principally engaged in residential real estate development and the provision of property management services. It focuses on Tier II cities in China.

Starwood Asia Pacific Hotels and Resorts (HOT): Starwood Hotels & Resorts Worldwide, Inc. is a hotel and leisure company. The Company conducts its hotel and leisure business both directly and through its subsidiaries.

Aluminum Corp. of China (NYSE: ACH): Aluminum Corporation of China Limited (Chalco) is an aluminum producer with operations in bauxite mining, alumina refining, primary aluminum smelting and aluminum fabrication.

China Precision Steel (Nasdaq: CPSL): China Precision Steel, Inc. is a steel processing company principally engaged in the manufacture and sale of high precision cold-rolled steel products and in the provision of heat treatment and cutting of medium and high carbon hot-rolled steel strips.

Ghost Towns Of China

Ordos: Meant as home for one million people, the Kangbashi district remains nearly empty five years after construction began. Ordos is a hyper modern city, full of brand new glass walled residential and commercial buildings, but the only problem is that it's devoid of any inhabitants. Though many of the properties in Kangbashi have been sold and a million people were projected to be living in Kangbashi by 2010, the city is still empty.

Bloomberg reports that while designed for 300,000 people, Kangbashi, the new urban center of Ordos prefecture west of Beijing, may have only 28,000 residents, Bank of America-Merrill Lynch said in a May 10 note. In fact, work has already stopped in this Ghost town, as local leaders who planned the town ran out of money long before it was finished. China's 13.6 trillion yuan ($2 trillion) of new loans in the past 17 months, bigger than the economies of South Korea, Taiwan and Hong Kong combined, is “unprecedented in 400 years of economic history.

Chenggong: Construction of this city in Yunnan province started in 2003. Seven years later, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them. Basically, the city has got everything except for the one major ingredient a thriving city needs: people.

Thames Town: Shanghai's satellite settlement of Thames Town opened in 2006 as part of Shanghai’s One City, Nine Towns program, with low-rise apartments and gated complexes designed to house 10,000 residents. Despite an intensive marketing effort (including a beauty pageant), the community failed to take off, and what was left is a ghost town that is nothing more than an ideal place for a quiet afternoon stroll.

New South China Mall: Imagine going shopping in the most populated country on earth and not seeing a single soul, let alone any shops. That’s exactly what one witnesses in the New South China Mall, which opened in 2005, and now stands empty with 99 per cent of its shops having remained unleased and attractions including a 553-metre indoor and outdoor roller coaster standing idle. The mall, designed to attract an average of more than 70,000 visitors a day, has less than a dozen shops in its 9.6million sq ft of floor space.

Future Outlook:

According to the McKinsey Global Institute, Chinese cities are expected to add more than 350 million people by 2030, which will bring their urban-dwelling population to more than a billion. In the next 20 years, McKinsey estimates that China will have to build around 50,000 skyscrapers and literally millions of apartment buildings, as well as thousands of hospitals and universities, 170 new mass-transit systems, and hundreds of thousands of parks, schools, fire stations, and community centers. These cities must be built with levels of efficiency and sustainability that has never before been achieved. There simply is no other option. China needs to innovate or, essentially, die.

Our analysts believe that China is the perfect example of having attained too much too soon and the problem of such high huge growth is that the country never had the time to pause or time to rethink and reflect, causing enormous inequalities. There is a vast distance between people, so much so that now a new super rich elite class has emerged, clearly showing that first Maoism failed. The Chinese elite went many steps ahead of what Ten Xiao Ping professed two decades ago, that the primary goal of any business should be to bring prosperity to the common people. It's time that China takes a time out from all the maddening hoopla surrounding its economy to digest all this extreme exponential growth to consolidate and settle down with economic disparities that have suddenly caused fissures and conflicts.

Disclosure: No positions