**[investwise]** Chanos Is Wrong, China Is Building World Class Cities

 

Hedge fund manager James Chanos recently sat down with Charlie Rose to discuss his short China thesis. You can read the transcript here. An excerpt: JAMES CHANOS: Well, again, the perception seems to be that China will grow into this real estate problem. But there's a problem with that argument, and that is the real estate that's being built is not being built for the masses. This is not affordable housing for the middle-class. This is high-end condos in major urban areas and high-end office buildings. Just to give you an idea what price ranges are like, right now construction costs in China are starting to hit $100 to $150 per square foot in some of the cities. The typical Chinese condo is 100 square meters, about 1,100 square feet. So that means a condominium with no floors, no walls and no appliances costs the average Chinese two-income couple USD$100 to $150 per square foot.   Now, you do the math. Incomes are about $3,500 per capita in China, urban areas slightly higher. A Chinese two-income couple in their 30s probably makes combined $7,000 or $8,000 a year. Even if they were making $10,000 to $15,000 a year, they couldn't carry a $150,000 condo.   This is very similar to someone making $40,000 in the U.S. at the height of our bubble and buying an $800,000 house. And we know how that ended.   Chanos, the founder of Kynikos Associates Ltd, has a terrific track-record. He makes some compelling points, especially about commercial office and retail real estate.   However, I am not convinced by his bearishness about residential property, and I think he is making a mistake by looking at China as one unified real estate market.  There are significant variances between cities, and I think Chanos is underestimating the poor quality of current housing (has he spent a night in local Beijing housing yet?), the pent up demand to upgrade, and the increasing urbanization of rural suburbs.   In the case of Beijing, residential real estate (disclosure: I have property inside the Third Ring Road) may be getting ahead of itself but not yet be a bubble. That said, I would not be a buyer right now given the policy risk. Here is why I think Beijing may not yet be in a crazy bubble:     1. Beijing is the capital city of the largest country in the world with the fastest growing major economy;   2. Beijing's housing market is really a nationwide housing market. Every person with means in China wants to buy in Beijing. Beijing is the center of power, it has the best education system in the country and it has the best health system; UPDATE: This point may not hold much water for a while, as new rules limit purchases of non-residents-never underestimate policy risk in China.   3. As the capital of China Beijing attracts rich buyers from the global Chinese diaspora;   4. As I wrote recently, the skyrocketing relocation compensation costs within central Beijing make any new constructive extremely expensive. UPDATE: News reports today state that the relocation compensation for the Tongzhou New City exceeds 15,000 RMB/m;   5. Prime developments inside the Third Ring Road are still less than $1000 square foot equivalent; compare to similar locations in New York, Tokyo or London;   6. Using official statistics to calculate average Beijing income to show that real estate is overpriced is misleading. Rich people from all over China buy here, and the official income statistics understate how much money Beijingers have at their disposal;   7. Beijing's population just hit 22 million, a number it was supposed to reach in 2020;   8. We are starting the emergence of a Greater Beijing Metropolitan Area, along the lines of the Greater Tokyo Area, stretching east, north and south into Hebei and Tianjin.   The eastern expansion of CBD and the Tongzhou New City , in Chinese but with lots of pictures) are just two examples of this sprawl, a trend that will likely make central Beijing property even more desirable and expensive. The government is massively upgrading the public transportation network (see a map of the planned subway expansion) as part of this expansion of Greater Beijing.   The rising prices in Beijing are very painful for many Beijingers. But I think we are watching Beijing evolve into a truly world-class city, along the lines of New York, Tokyo or London. How many New Yorkers or Londoners or Tokyo residents can afford to live in the city center as opposed to commuting in from a suburb?   The same dynamic is at play in Beijing. .   Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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