Hot investment money is pouring into mainland China’s biggest and most well-known cities.  Shanghai has been a haven for foreigners buying commercial properties.  Buoyed by rising property values, they are now also purchasing luxury residential real estate, mostly for rental purposes.  Today the money is coming quickly from U.S., European, and Indian investors.  But reality is that Chinese speculation in the Shanghai, Hangzhou and Beijing real estate markets is over.  Oddly enough, while hot Western money is flowing into the People’s Republic of China (PRC), Chinese money for real estate purchases is flowing out.  For anyone who wants to make money in the Asian real estate market, it’s important now to watch closely where the mainland Chinese themselves buy and where trends likely will lead them. 

For the last three years mainland Chinese who have returned to the PRC from the U.S. are brokering property purchases in America.  Despite the distance and the hassle to get there, wealthy Chinese still see property in the U.S. as a solid investment that will return dividends over the long run.  Still, the U.S. market is a no-brainer for the Chinese investor.  It’s safe, it’s transparent, it’s mature, and it has endless choices based on your preferences.  But, with the Hong Kong investment boom in Vancouver long over, no spot in North America, outside of the traditional California markets, has proved a highly concentrated “settling” point for Chinese investors’ cash.

Chinese speculators, who currently are peaking their run in Southwest China’s Sichuan Province, however, are another story. 

Who are You Calling a Speculator?

Anyone who knows anything about real estate in the PRC has heard of the “Wenzhou Bang.”  In this case “bang” (pronounced in Mandarin Chinese with a short vowel ‘a’) benefits as much in meaning from its sound as the English word “BANG!” as from its Chinese meaning of “gang.”   Indeed, the “Wenzhou Gang” causes all kinds of smoke and noise when it arrives in and leaves a city.  This amorphous group is from one of the historically wealthiest cities in all of mainland China – wealth that never really disappeared when the Communist government took over in 1949. 

Wenzhou, a port city located in Zhejiang Province and isolated by high mountains from the rest of the PRC, has a long history of wealth-generation and contact with Western and Eastern trading communities.  By the time the real estate market for private properties first really opened in China around 1996, people from Wenzhou already has amassed enormous amounts of cash, much of which was being held at home or in local so-called “banks.”  Private property became the newest target in which to deposit the money by snapping up brand new residential properties in one-time payment deals. 

A pattern soon emerged.  The “Wenzhou Gang” suddenly would descend upon a city and begin buying up multiple available properties, driving real estate prices through the roof.  Some would take their profits and leave quickly; others would hold properties long enough to profit from downstream speculation generated by those following the Gang’s “nose for money.”  The “Gang” has blasted its way already through the PRC’s most obvious and attractive Hangzhou, Shanghai, and Beijing markets. 

However, the mainland Chinese government has been busy trying to fight this domestic speculation phenomenon in China’s property markets.  In addition, the PRC government is doing what it can to stop the hot foreign money flowing into Chinese real estate.  Banks have been ordered to raise interest rates and require larger down payments for loans on luxury properties.  Social pressure is forcing the government seriously to move quickly toward new property tax laws that will take the profit out of speculative ventures such as flipping properties in periods of less than five years.

In China, unrest among the middle class as well as the poor continues to grow as they see that property, which wasn’t even allowed to be in private hands 15 about years ago, is now already unaffordable to those of modest means.   Important equity questions are being raised by farmers who have forfeited land at rock bottom prices in what some claim were unfair transactions slipped through by developers, which local governments turned a blind eye.  In the last week, these “class struggle” issues have led the Chinese government to switch its policy directions for property development in urban areas.  Previously, a city’s property development target mix was 70% luxury properties (i.e., apartment units of 90 square meters or above) and 30% regular properties (apartment units below 90 square meters) affordable for most urban Chinese middle class families using 20% down payments coupled with bank mortgages.  In the last few days, the Chinese government has ordered metropolitan areas to change its development mix.  Now, all new property development projects must conform to the ratio of 70%  regular properties and only 30% luxury properties.  With luxury apartments about to dry up for investment, Chinese speculators are further forced out as they must move their money somewhere else rather than compete for a shrinking supply of purchase opportunities.

It’s obvious that Chinese money will have to flow elsewhere since the early glory days of real estate speculation/investment in China are coming to an end for all.  Not only is the profit potential drying up, but social pressures within China are bringing back to the forefront a historical reality of China’s “class” structure.  Rich people in China have never felt safe or completely at ease, knowing that obvious displays of wealth such as the ownership of multiple properties make them prime targets for a community undercurrent which remembers the historical abuses of the “landed gentry.”  With a vast agricultural population, the threat of civil disorder in modern China arising from lack of equity between the landed and the poor, a gap which is growing larger daily, has always been an impetus for the extremely wealthy Chinese investor to keep at least one home abroad as a safe haven.

So where will the “Wenzhou Gang” go?

Although they haven’t yet figured it out, the hottest prospect for fast growth in Asian real estate available to mainland Chinese money is Singapore.  And, if the “Gang” is reading the papers, the tip-off came for them in a Saturday, May 27th, announcement by the Singapore government that was carried in papers all over the world, including on the front page of the Wall Street Journal’s internet edition (http://online.wsj.com/home/us).  The Singapore government proudly announced that the Las Vegas Sands Corporation won the hotly contested contract to build a casino in a new “integrated resort” project on Marina Bay.  From there, the “Gang” doesn’t have to look far to see that all the international fundamentals are in place for a quick profit in a Singapore residential property boom.

Laws and Projects in Place – Ready for Take Off

The 1997 Asian financial crisis affected Singapore’s real estate market dramatically.  Residents saw a 50% drop in private property values and rental prices.  One Singaporean, who had bought at the height of the market explained, “I now pay SNG $2,300 a month on a mortgage for an apartment I can only rent out for SNG $700 today.  My financial advisor is suggesting my friends and I all declare bankruptcy.”   Fortunately, in 2003 things began to look up as the Singapore government made some hard choices.

Two new laws passed in 2005 and 2006 in Singapore and the PRC along with new Singaporean development initiatives form a solid base to under gird growth potential and job creation that will boost Singapore real estate in its own Central Business District (CBD).

FUNDAMENTAL ONE:  On May 27, 2006, high profile competitive bidding by MGM, Las Vegas Sands, and the Genting International Corporation finally resulted in the Las Vegas Sands Corporation (www.lasvegassands.com)  winning the CBD tender.  Its Singapore dollar $5 billion investment in the “integrated resort” project is expected, according to Singapore’s Prime Minister Lee Hsien-loong, to bring 35,000 new jobs to Singapore within the next few years.  Completion of the casino-resort in the CBD is expected for 2009.  The SNG $1.9 billion land purchase by the Sands will take place in the next 90 days.

FUNDAMENTAL TWO:  In July 2005 Singapore’s government opened up real estate ownership on 99-year lease properties to foreigners, who previously could invest only in freehold properties (owning property free and clear in perpetuity).  However, with the passage of this new law anyone can invest in Singapore’s private residential/rental properties.   In less than a year, mainland Chinese already have become the third largest group of foreigners shopping for investment property in Singapore. - Article Continued Below -