Prudential concerned about Chinese real estate market

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Prudential concerned about Chinese real estate market

Prudential concerned about Chinese real estate market

Financial giant Prudential has this week warned investors to be wary of the Chinese real estate market and also keep a very close eye on the Chinese banking sector. This will come as no surprise to investors who have been monitoring the situation in China with the government becoming more and more concerned about a house price bubble and a possible hard landing. In many ways the Chinese real estate market is in a so-called “Catch-22 situation” which we will cover below.

Is China over dependent upon real estate?

Some experts believe that the Chinese real estate market is in a very difficult situation with real estate investment heavily linked to local economic growth and employment. The main concerns are that when house prices rise investors become overly concerned about a “house price bubble” with some looking to sell into strength and bank their profit.

On the flipside of the coin, such is the strong link between real estate investment and local/national economic performance that when house prices fall investors become very agitated. A slowing of the real estate market has been seen to prompt concerns about a slowdown in wider economic growth which hits the whole investment arena with both real estate and banking shares coming under pressure.

Quote from PropertyForum.com: “It seems as though the Chinese authorities are softening their stance on Real Estate Investment Trusts at a time when the real estate market in China is under major pressure. Could REITs offer an escape route for the authorities? Will their long term investment strategies bring some much need stability to the market?”

Should we be concerned?

There have been concerns for some time about the performance of the Chinese real estate market and ultimately the Chinese government will eventually win the day. Even though international investors often flock to the Chinese real estate market, through direct or indirect investment vehicles, the authorities are very much “hands-on”. Over the last few months we have seen a variety of new tactics used by the authorities although surprisingly there has been limited long-term impact upon the real estate market. This has led some investors to wonder whether the Chinese authorities will soon announce a very tough and potentially damaging new strategy to regain control.

As we have seen over the last few months, more and more Chinese real estate investors have been looking overseas for their real estate exposure. We have also seen situations where local Chinese investments have headed south forcing locally-based investors to repatriate overseas funds to cover their potential exposure. There are very few countries in the world which have not been impacted by the ongoing flood of Chinese investment in overseas markets.

Why are investors not looking to buy on weakness?

Traditionally many investors wait to buy on significant short-term share price weakness with a long-term goal in mind. As long as the long-term story remains intact there are many investors, very often linked to long-term investment vehicles such as pensions, happy to dip their toe in the water as prices come under pressure. Prudential believes that this situation is unlikely to occur in the short to medium term if we see a dip in Chinese real estate and banking shares. As we touched on above, the potential knock-on effect to the wider economy will always be in the back of the minds of investors, both local and international, with many preferring to wait until the trend turns.

It is common knowledge that many Chinese banks have significant exposure to the Chinese real estate market and a downturn in this particular sector would probably have a knock-on effect to other investment sectors and financial services. It can be difficult to pinpoint a turning point in the Chinese real estate market especially with the very hands-on approach of the Chinese authorities.

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