China Aoyuan Property Group Limited (HKG:3883), a CN¥13.66b small-cap, operates in the real estate industry which is the most prevalent industry in the
China in 2015: Is now a good time to invest in the Chinese real estate market?
Heavens no. The Chinese real estate market as a whole has been overheated for at least 7 years, in part due to lax restrictions on lending by government-affiliated banks to government-affiliated firms that engage in construction and real estate development.
For some color on this subject, you only need to consider the following fact. The quality of housing that you get for renting at 10,000 RMB per month is approximately equal to the quality of housing that you get putting 50% down on a mortgage AND paying 25,000 RMB per month in mortgage payments.
Another way to put it is to think of it like the P/E ratio of a stock. How much are you paying for the Price in return for the Earnings you can get by renting the asset for one year? Or how many years will it take for you to pay back your original investment given current income that can be generated from the asset? In the first-tier cities of China, this number usually is around 60, often times more. Moreover, keep in mind that in China, when you buy a house/apartment, you do not own the land. You only own the structure for a term of 70 years. Essentially, by the time you earn back your money, you will have to give your house back to the government!
By comparison, in New York City and San Francisco, really great properties will fetch 25-30. The average stock in the S&P500 currently fetches around 18, and that is on the higher end of its historical range. In sleepy Southern metropolises in the US, you can easily purchase homes at a 10 multiple.
Much better these days to start a business in China than to buy real estate there. It’s a classic Greater Fool investment. If you’re buying now at these prices, you are in no way buying value. You are simply betting that someone else will come along in a few years and pay you more money for your investment, just because that is what has happened for the past 20 years. You are betting that you can find a “greater fool” than you. At some point, investments that rely on this type of investment thesis eventually blow up.
And when that happens, don’t be left holding the bag.