Is The Real Estate Market In China In A Bubble? This Singapore Billionaire Begs To Differ

BubbleIt seems to me that there’s constant chatter in financial media about China’s real estate market being in a “bubble.” In addition, there’s also been talk of how Chinese banks, which have lent heavily to participants in the real estate market, might be caught in a very bad place should the apparent “bubble” burst.

Is the situation really as bad as it seems? Should investors avoid any exposure to China’s real estate market? Given that two of Singapore’s largest publicly-listed real estate outfits, CapitaLand (SGX: C31) and City Development (SGX: C09), have significant exposure to that particular market in China, investors in Singapore – and especially in those two companies – might want to give some serious thought about the issue.

A billionaire begs to differ

Although there’s no lack of worried folks about China’s property “bubble”, Singapore billionaire Kwek Leng Beng, Chairman of City Development, would likely not be one of them. He’s not worried about the property market in China – for two good reasons.

Firstly, properties in China require buyers to make down payments that are between 30% and 70% of the property’s value. This is in almost direct contrast to the USA at the height of the country’s property bubble in the mid-2000’s when there were cases of real estate being bought without any down payment needed (the buyers’ credit histories were sometimes not even checked!). For China to have a property crisis under its current circumstance, property prices would have to fall by more than 70% – that’s quite an unlikely scenario.

Secondly, China is such a vast country (13,400 times the size of Singapore!). Therefore, it’s unwise to group the whole of China as a single, homogeneous property market. As most land sale decisions are made at the provincial level, rather than at the central government level, the situation in different cities and provinces can be markedly different. Yes – the media have often highlighted the plight of China’s “ghost cities” (cities that have sprawling residential, commercial, and retail real estate but which lack a crucial ingredient: people). But, it seems that “ghost cities” represent just a very small percentage of what China actually looks like.

Foolish Summary

All in all, the property market in China might not be as bad as first feared.

Of course, there will certainly be some risks involved with the sector given the fact that the Chinese central government is embarking on a series of property cooling measures. But, on the other hand, China remains a fast growing nation with a huge rural population – for some perspective, in 2012, China had only 680 million citizens out of 1.35 billion living in cities – that would require proper housing if they decide to become urbanites. That potential tidal wave of urbanisation could provide a strong tailwind for the Chinese real estate market.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.