Top Chinese Developer-Investor Sees No Bubble Surfacing in Either Beijing or Hong Kong

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UPDATE: Top Chinese Developer-Investor Sees No Bubble Surfacing in Either Beijing or Hong Kong

Posted by Alex Finkelstein 08/09/10 8:15 AM EST
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Wilfred Wong

Few individuals are closer to the real estate scenes in China or Hong Kong than Wilfred Wong. He is a deputy of the National Congress of the People's Republic and also executive chairman of China, Pacific Star Group, a 100 percent privately-owned real estate investment firm based in Singapore.

In a far-reaching recent interview in Hong Kong with the Financial Times of London, Wong explained why real estate bubbles won't implode in either China or Hong Kong despite repeated predictions by some analysts.

Maik Rodewald, editor-in-chief, continental Europe, Pensions & Investment Group, Financial Times, challenged Wong to explain why some Western investors are bothered that property prices can be manipulated unpredictably by the Chinese government.

Maik Rodewald

"On the contrary," Wong replies. "In fact, it's an advantage that the government still has influence on many things. That's why things are easier to predict [than] if you leave it to the market.

"In a free-market economy, a bubble bursts automatically. In China one tries to avoid bubbles actively.

Wong says, "Visualize the following: China is still a Socialist country. The government will not allow that property prices will diverge too far away from the average income.

"That's why city governments are not allowed any more to auction in a discretionary way as much land as they want and banks are not allowed any more to assign as many mortgage loans."

Hong Kong skyline

Wong was part of the government team that prepared the handover of Hong Kong from Great Britain to Beijing in 1997. The United Kingdom had overseen Hong Kong under a 100-year lease that expired in 1997.

On Hong Kong specifically, Wong concedes "the prices for residential property are on a high level, yes. But they have only just surpassed the level of 1997, just before the British handed back Hong Kong to the Chinese. Hong Kong has always been expensive, but I don't see a bubble."

Rodewald chatted with Wong on a variety of real-estate development and investment topics.

Q: As head of Pacific Star's operation in China you are also in charge of Hong Kong. Do you still invest over here?

A: No. We had our last transaction in 2007. The yields are not attractive enough. And as for property developments the market is very small over here, and very narrow. It is dominated by a few big players like Henderson or Sun Hung Kai. For us, China is much more interesting.

Q: But real estate bubbles are also under discussion for China.

A: One can't generalize. There is of course a limited amount of office buildings in premium locations in Shanghai and Beijing and therefore they are expensive.

Q: But compared to Hong Kong the prices are low. Why?

A: They aren't yet international cities, the renminbi is not freely convertible and the Chinese government still limits foreign real estate investment in order to avoid pressure on the renminbi and to prevent real estate speculation. In other words, the government suppresses the price of the buildings. As soon as this changes, prices will rise on a big scale.

(The Renminbi is the official currency of the People's Republic of China whose principal unit is the Yuan. The currency is legal tender in mainland China, but not in Hong Kong and Macau.)

Beijing skyline

Q: Do you see the biggest yield opportunities for China?

A: I wouldn't say it like that. I personally see the biggest chances in countries like Vietnam and India. These are very immature markets, real emerging countries.

The most stable markets are for sure the real estate markets of Tokyo, Hong Kong, Singapore and Seoul. China and Malaysia are somewhere in between regarding their development status.

But don't forget: the Chinese real estate market has only existed for two decades. The land lease system over here - the country still belongs to the government - is still not transparent.

Q: Does this apply also for European institutional investors?

A: For all investors who are not close. If today there is an interesting project, then tomorrow a state-owned company [will seize] it. To be part of such projects is very difficult. And these state-owned companies have money, a lot of money.

The relative lack of transparency is further reinforced by the market's velocity of change. It's beyond imagination. The market is almost too fast for the mostly lengthy decision-making processes of institutional investors like a pension fund.

Q: What does this mean concretely?

A: Many details, rules and regulations - which the city governments are responsible for - can be completely different from each other and change almost weekly. Therefore, if one is not present on a daily basis and interconnected very well, one will hardly be successful. The regulations differ in such a big way.

Q: Give us an example.

A: In Shanghai, everything that is below the ground doesn't count towards your plot ratio. So in Shanghai you'll find five-story basements, because it's free of charge.

In Chongqing, because it's a mountainous city, the underground counts.

So you have to know what counts and what doesn't. Also, in some cities you can start selling or pre-sell once you have completed the foundation work, in others like Shanghai much later. That makes a big difference in the cash flow.

Q: What do foreign (European) institutions do wrong?

A: Firstly, many are treating China as one big market; they ignore regional differences. Secondly, they only look at the big cities in the first tier, namely Shanghai, Beijing etc.

The second-tier cities like Tianjin, near Beijing, or Hangzhou, near Shanghai, are growing even faster and have become almost as expensive. Those investors miss out on these kind of chances.

Q: Those investors are dreading the risk of lack of transparency. When is the Chinese market going to be more transparent?

A: Compared to the situation at the beginning of the '90s, when you still had to negotiate with the officials bilaterally about pieces of land and there were no public auctions or tenders, much has happened.

My forecast: In five years' time the real estate markets of China will be much more transparent, the home advantage of the insiders will weaken gradually and many more international players will gain a foothold in China, as investors from Malaysia, Korea and Taiwan already do. Currently mainly domestic companies are active, including those from Hong Kong.

Q: Among Western pension funds who are mainly oriented towards stability - stable income, stable performance - Asia's real estate markets are still regarded as very risky.

A: From their point of view they are risky indeed. From our point of view the higher risk entails higher growth. One example is the fact of much shorter leasing contracts which are common in Asia.

They are a blessing for Asian investment houses and investors as, after all, one expects that the rents will rise. The perceived stability of longer leasing contracts is, from an Asian perspective, rather more risky.

Q: So far, European investors are backing off. When will they start to invest?

A: That's only a question of time. See what's happening worldwide. Which region has the biggest growth story? Asia.

Q: In Germany, green buildings are on the agenda now. What about Asia?

A: It's in its infancy. Don't forget, green buildings are expensive. But we realize that it's a worldwide trend. Shanghai, for example, lowered the maximum plot ratio, that is, the gross floor area that you are allowed to build, years ago from 6 to 8 to 2.5 to 4 in order to avoid the inner city becoming a concrete jungle.

For the sake of comparison, in the city center of Hong Kong, the plot ratio is still 15. That means that you can build 15 square meters per 1 square meter of land (162 square feet per 10.76 square feet.)

Eco-City Tianjin, Singapore

Q: There is an Eco-City project in Tianjin that is being created together with Singapore. Is this only the start?

A: The government has entered that path. Therefore one can assume that they will continue with it. We will plan our own projects, the new towns, as green as possible.

Q: What are these new towns all about?

A: In order to push the urbanization process, the Chinese government encourages developers to plan and build entire cities.

That's exactly what we want to do and therefore I'm currently negotiating with the government. We plan to build eco-friendly cities on a 1.5m to 2m sq meters stretch of land, 15 to 20km away from Shanghai and Beijing.

For this you need some specialized developers, as the new towns are meant to be proper towns, with hospitals, retail and office buildings, so that people don't have to commute any more.

The government will provide the infrastructure, streets, railway connections and lighting. We will push this forward in collaboration with another listed development company.

Q: Are you the only company that plans to do that?

A: I don't know of any other company. The Eco-City Tianjin certainly is a similar project, but it is financed by the government.

We are a 100 per cent privately owned company, despite my official function as a deputy for the Chinese People's Congress.

Q: Will you be looking for investors for the new towns?

A: Yes. We will establish a joint venture that we would like to list on the stock exchange in a few years' time.

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