Is the Chinese housing market overheated? Evergrande, a major Chinese real estate company, is still struggling with heavy financial problems. APG also invests in Chinese homes, among other things. Why? And in which other Asian real estate does APG invest? Graeme Torre, Head of APG Asia-Pacific Real Estate, talks about the Chinese government’s housing policy, investment opportunities thanks to the booming e-commerce, and the crux of doing business with Asians: show respect, be patient and remember your table manners.
This fall, investors in financial markets became very concerned about Evergrande, one of China’s largest real estate companies. It was about to collapse, with a debt burden of about EUR 260 billion. That concern was logical; collapse of Evergrande can cause a domino effect, first in the Chinese real estate world and then beyond. Because roughly a quarter of the Chinese economy consists of real estate-related activities. For now, it seems that Evergrande, with the support of the Chinese government and the sale of business units, is barely fulfilling its obligations.
APG has been investing in Asian real estate for many years, including in China. Briton Graeme Torre is Head of Asia-Pacific Real Estate and works from Hong Kong with his team of sixteen APG employees. What does he think about the bubble in the Chinese real estate market?
Graeme Torre: “People have been talking about this for about fifteen years now. I for one don’t think that this bubble is that big, let alone that it will burst. True, there are plenty of indicators that point to overheating. But the catastrophic collapse of the housing market, predicted by many, isn’t happening. The Chinese government wants to ensure that as many people as possible can own their own home. Many Chinese are still moving from the countryside, i.e. from western China, to the big cities on the east coast, in search of work. And they need to be housed. What we see now is that the Chinese government is not afraid to have a strong hand in the housing market.”
So how do they do that?
“They impose restrictions in various ways. They apply a policy of so-called three “red lines”. The gist of this is that real estate developers, like Evergrande, must deleverage and report to the Chinese central bank each month. As long as they don’t improve their debt position, they’re not allowed to take out new loans at the banks. With this strict policy, the government seems to be able to keep the Chinese real estate market on track. Incidentally, there are so many real estate companies in China that there are always a few in danger of collapse and which then becomes global news. But in my view, that doesn’t paint an accurate picture of the Chinese real estate market.”
What do these developments mean to APG’s investments in Chinese homes?
“It’s clear that the Chinese government wants to protect the affordability of houses as much as possible. Part of that policy is that in recent years they have focused on the development of rented housing. That’s why we have added rental apartments to our portfolio of investments in Chinese real estate. We mainly do this with the American real estate developer and manager Greystar. We focus on high-quality homes in city centers in the mid-price range. The main target group is the younger professionals, both singles and families, who have just moved to the city or who are still saving for the purchase of their first home.”