Living in a bubble?

One of the big beneficiaries of China’s property boom is Zhang Xin


Zhang: billionaire property developer, now buying buildings in US

The lyric “We’ll take Manhattan” was penned almost 90 years ago. But it might still resonate with Zhang Xin and her husband Pan Shiyi. Why? Because that’s exactly what the two are doing.

The billionaire real estate moguls announced last month that they were bidding with a Brazilian banking tycoon for a 49% stake in New York’s iconic GM Building. The $1 billion purchase for the 50-storey tower overlooking Central Park makes it the most expensive office building in the United States.

In fact, this is the third New York purchase for the co-founders of property developer SOHO China. Late last year they bought the Sony Tower on the corner of Madison Avenue and 56th Street; while in 2011 they acquired a 45% stake in Park Avenue Plaza.

The is symbolic of a trend that WiC has written about frequently: affluent Chinese buying property overseas, particularly in the US. We first touched on the theme in issue 4 and discussed it as recently as issue 193.

Zhang herself is also a symbol: she’s regarded as one of the most successful people in one of China’s key industries, real estate development. Her life story also speaks volumes about the transformations that have occurred in China over the past three decades. She wasn’t born rich: far from it (as she told the Daily Telegraph she spent her childhood in a grim block on the outskirts of Beijing, eating canteen-cooked rice from an iron bowl alongside the children of other toiling workers). With her mother, Zhang then went to Hong Kong, where she worked in a factory, and by age 20 had saved enough money to fly to the UK. A scholarship to Cambridge University followed, and after that jobs in investment banking with Barings and Goldman Sachs.

In 1994 she returned to China, where she met her husband Pan, and together they established SOHO. The plan was to build stylish apartments in Beijing for the country’s growing middle class. As SOHO evolved over the next decade and a half, it switched focus to office complexes, working with prominent international architects like Zaha Hadid, and focusing on Beijing and Shanghai.

A timely Hong Kong listing in 2007 helped the company to raise enough cash to turn the subsequent global financial crisis into a buying opportunity. As we reported in one of our earliest issues (see WiC17) Zhang announced a plan to acquire office buildings in Beijing and Shanghai from other developers facing a cash-crunch. SOHO has stayed one step ahead of many of its competitors. As we noted last August, the firm reacted to further change in the local market by adopting a new strategy. Rather than focusing on selling units in their developments, Zhang said SOHO was transitioning to a buy-and-hold approach – leasing out its prime office and retail space to corporate tenants. This made sense, she said, because rising rents offered more predictable cashflows. The move also enabled the firm to monetise the brand value attached to their distinctive buildings.

Zhang’s name has cropped up frequently in WiC (she’s appeared in 17 articles, while SOHO China has been mentioned in at least 30). That’s a substantial proportion of the 80 or so pieces we’ve written on the property market, explaining why we selected her for this special issue.

Equally, in coming up with the key themes that have dominated our coverage over the past five years, real estate was arguably top of the list. As we pointed out in WiC166, it’s not glib to say China’s economy ‘is’ the property market. Everything from the international price of iron ore to car sales seems to have a connection with it. Not surprisingly construction of new apartment blocks across the country drives demand for steel, concrete and glass. As South China Morning Post columnist Tom Holland also noted last September there is “an almost perfect correlation” between the state of the real estate market and GDP growth.

But for those trying to get a steer on the economy, the real estate market is also something of an enigma, prone to dispute between pundits over whether China is experiencing a property bubble. We’ve lost count of the number of times we have explored this topic. Early into the fray was hedge fund manager Jim Chanos, who described the sector as “Dubai times a thousand – or worse” and predicted the Chinese economy was resultantly on a “treadmill to hell”.

Chanos and others in the bearish camp claim there is massive oversupply in the market, pointing to cases like the Kangbashi New Central District in Erdos. It was ambitiously designed for a million people – and paid for by the proceeds of the city’s coal boom – but the district lies eerily empty. We profiled another city with a vacancy problem too: Guiyang in Southwest China (see WiC168), which saw prices for flats plummet after developers built too aggressively.

Monthly housing data has also been used to make the case that prices in cities like Beijing and Shanghai have ‘bubbled’ into unaffordable (and unsustainable) territory.

Against this, the more bullish analysts point to another narrative – that the building boom is part of a megatrend, China’s rapid urbanisation. Taking a more positive view, they claim this new housing is needed and will also become affordable for more people as incomes continue to rise. They have some compelling statistics too. The percentage of Chinese living in towns and cities edged over 50% for the first time in history in 2011. And around 300 million more are expected to make a similar transition in the decades ahead. In our Talking Point in issue 171 we detailed the arguments of these property optimists.

In truth, what WiC has come to realise is that making generalisations about China’s real estate market is the trickiest thing of all. One city may be experiencing a rapid run-up in prices, while another has hundreds of thousands of empty units. China’s size and diversity means that it has thousands of distinct property markets, each of which is different.

For the central government this creates a quandary, not least as local governments have long depended on land sales to prop up their rickety finances.

Yet the ‘property market’ is also a social issue, stirring anger among those who can’t afford to buy (a hit TV series called Dwelling Narrowness was aired on this theme) as well as causing frustration for those forced to live in cramped rental conditions (see more on the “ant tribe” in WiC58). Various rounds of policy initiatives designed to dampen prices have tried to make flats more affordable but the measures can also have bizarre consequences. For example, outgoing prime minister Wen Jiabao’s final attempt to cool prices via new regulations for second homes led to a spike in divorces (see WiC184 for an explanation of why).

Meanwhile that last round of property controls – launched in March before Wen stepped down – is a major reason why China’s GDP has been slowing. The new government finds itself in a delicate position. Data from 70 or so of the biggest cities indicate that prices remain stubbornly high. But if policymakers push for measures that bring prices down further, the risk is that GDP growth falls and the economy stumbles.

That being the case, expect more articles in WiC in the months ahead poring over construction data and apartment sales…

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