Asia’s state-monopolized Monopoly board

Who are the Masters of Asia’s Property Boom?

Who are the Masters of Asia’s Property Boom?

In a sense, the modern real estate game is like playing monopoly on a board of boards.

In the real world, governments control the monopoly pieces. They are also the bankers. So why not invest in a company that is already playing the game?

For instance, land prices in Shanghai are considered unsustainable due to low interest rates and a limited supply of quality assets.

The Chinese government’s solution? A master plan to limit population growth in the inner city and shift demand to ‘satellite cities’, like Hangzhou and Suzhou, connected by high-speed rail networks.

A high-speed train in Shanghai China. Commuting trains like these are the government’s solution to ease urban property price woes. (Shutterstock)

Here are a couple things to note.

#1: State-owned or State-backed developers with vast land banks are responsible for the real estate fever across China

No one wants to pull the plug on the property development and speculation party that has been a significant driver of China’s economic growth.

The country’s heavy dependence on this sector is why many state-owned developers have been responsible for rising land prices.

Through the backing of state-owned banks, they aggressively bid for land.

Their influence was vast. For instance, in early 2016, almost half of China’s most expensive real estate was bid on by state-run development firms.

One property developer, China Resources Land Limited’s (1109:HK), for example has almost half of its asset value located in China’s four largest cities. Meanwhile, its state-owned parent company subsidizes the firm with steeply discounted assets.

It’s a great trade deal…if you’re in the inner circle that is…

Due to the firm’s sweet deal, revenue growth year over year (YOY) in the fiscal year of 2016 kept on growing, while operation margins averaged approximately 33 percent in 2015 and 2016.

The company also has a higher price to earnings (P/E) ratio relative to peers despite slower revenue growth. Not to mention, its price to book (P/B) ratio is at a steady 1.56.

Other similar cases include KWG Property Holding Limited (1813:HK) and Shui On Land Limited (272:HK).

Both KWG and Shui On Land holds hold 33 percent portfolio exposure to Guangzhou and Shanghai respectively.

Another state-owned enterprise fitting this description is the Greenland Group. They developed domestically and invest in international properties.

#2 Banks, developers and government are all merrily holding hands

Speculators have been running loose, believing in the government’s support through state-owned developers. They are all-in with the belief of ever-soaring prices and guaranteed profits.

However, it’s unlikely that this bubble fueled by irrational exuberance will end well.

Despite government policy changes, shadow banking is a dominant force increasing leverage in China’s already overleveraged market.

Furthermore, bond markets have continued to grow rapidly. Local currency bonds have become major vehicles for developers to refinance their debt portfolios for cheaper capital.

This makes enforcement difficult.

Unlike in a Monopoly game, where players may find humor in an unbalanced system, in the non-fantasy world, a potential collapse in shadow banks would be catastrophic for the entire system.

Real consequences are created from this sly development game.

So, will Asia’s real estate crumble from the inside out? Find out tomorrow if Asia’s construction companies are built to last.