Thursday, March 27, 2008

The Most Important Article You Probably Didn’t Read This Week

The most important article you probably didn’t read this week appeared in the Wednesday edition of the Wall Street Journal, Section C, page 10 (in our edition), buried in “The Property Report” next to a Caldwell Banker advertisement.

Now, it is true that the most important article you probably didn’t read contains all the usual hair-raising things you’d expect to see about the real estate market, including “developers under siege,” “signs of weakness in key markets,” developers “slashing prices,” and the head of a major builder advising “that people wait three to four years before purchasing a new home.”

But the most important article you probably didn’t read is not about real estate markets in Naples, Florida, or Sacramento, California.

It is about China.

Tables Turn Quickly on Chinese Developers
After Buying Up Land, Firms Can't Raise Enough Cash to Build

By JONATHAN CHENGMarch 26, 2008; Page C10

HONG KONG -- Just six months ago, Chinese property developers were on a shopping spree, dipping deep and borrowing heavily to snap up more, and more expensive, pieces of land.

How quickly things have changed.

Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade.

There follows fourteen more paragraphs with some of the most graphic detail on the currently imploding Chinese real estate market that has yet to appear in a major business publication, and most likely you didn't read it.

At least, we assume you didn’t read it because the article didn’t make the top 10 “Most Viewed” or even the 10 “Most Emailed” in the online version of the Wall Street Journal, thanks to its being buried in a bunch of boring real estate ads on Page C-10.

If we here at NotMakingThisUp ran the joint, the story would have been the entire front page, under a banner headline on par with the Apollo Moon Landing, Dewey Defeats Truman, and Hillary Dodges Bullets in Bosnia.

How the Journal’s front-page editors missed breaking the greatest new story of 2008 is beyond us. Maybe Rupert Murdoch doesn’t want to upset his friends in China, what with the Olympics coming and Tibet trying to escape Chinese suppression and all.

In any event, we urge you to stop reading this and head straight to the Journal’s web site. Read the article carefully and then print it out for your files.

Yesterday's article will be “Exhibit 1” in what will become, we suspect, a very fat file on the impending Chinese Real Estate Implosion.

Jeff Matthews
I Am Not Making This Up

© 2008 Not Making This Up LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Stupid PF Tricks said...

Somehow this article seems to utterly lack relevance in the life of the average working class American.

Tahoe Kid said...

It's not just happening in China:

Mumbai's Land Sale Signals Prices May Dip, Credit Suisse Says

By Sumit Sharma

March 19 (Bloomberg) -- India's developers will begin to lower prices after commercial capital Mumbai failed to attract bids at a land auction for the first time in 13 years, signaling a dip in property demand, Credit Suisse said.

Mumbai's metropolitan authority received no bids for the sale of two of five plots at Bandra-Kurla Complex, and sold another site to the sole bidder yesterday. The city's development authority collected 13.2 billion rupees ($326 million) from the sale, 31 percent lower than the minimum 19 billion it expected.

A global equity sell-off and the subprime crisis in the U.S. have reduced investor appetite for real estate stocks and may herald an end to a four-year property rally. Prices of offices in Mumbai have risen more than three times in the past four years, according to Cushman & Wakefield Inc. data, as the economy averaged 8.6 percent annual economic growth during that time.

``A slowdown in real estate prices has been talked about for some time, and now appears eminent,'' analysts Anand Agarwal and Musaed Noorani said today in a note to clients. ``It seems like only a matter of time before developers begin to cut prices.''

Unitech Ltd.'s development on a 127-acre plot near the Bandra-Kurla Complex may face weaker margins because of the response to neighboring sites at the government auction, the analysts said.

The BSE Realty Index, which doubled from August to January, fell 47 percent since its Jan. 14 peak. Unitech, the second biggest developer, declined 49 percent since its Jan. 2 peak, while DLF Ltd., the biggest developer, fell 40 percent this year.

`Lack of Appetite'

``It clearly indicates lack of appetite for commercial property at higher prices,'' said Pujit Aggarwal, managing director at Orbit Corp. in Mumbai. ``Prices could fall by up to 20 percent in Mumbai's suburbs. Prices are also declining in the rest of the country with increasing supply and slowing sales.''

Unitech fell 3.6 percent to 267 rupees at 3:30 p.m. in Mumbai, while DLF Ltd. fell 1.9 percent to 623. Indiabuls Real Estate Ltd. traded 1.8 percent lower to 443.25 rupees. The benchmark Sensex index was trading 1.4 percent higher at 15,037.85.

Jet Airways (India) Ltd., the nation's biggest domestic carrier, was the sole bidder for one commercial plot in the Bandra-Kurla Complex, home to a stock exchange and diamond bourse. The offer by Jet Airways was 33 percent lower than the highest bid in November for a similar plot, Credit Suisse said.

Mumbai has been developing Bandra-Kurla Complex as an alternative financial center to the main business district of Nariman Point and has already attracted Citigroup Inc., the National Stock Exchange, ICICI Bank Ltd. and other financial service companies.

To contact the reporter on this story: Sumit Sharma in Mumbai at

Last Updated: March 19, 2008 06:36 EDT

cadamyale said...

Such is the nature when one buys properties at lower cash flow yields than the rates at which they obtain their financing.

jpmist said...

Hey, I read it.

But you're right, it sorta washed over me. "Hmm, things are starting to suck over there too. . ." But then China stocks have been trending down for months now and our own financial crisis looms a bit larger than anyone elses.

But I get it. The first shoe of what is going to be a really interesting collapse. I doubt China's leaders have the chops to manage spiraling inflation, a strengthening yuan, an economic slowdown, political unrest, and an embarrassing Olympics where people in the back row can't see the athletes because of the smog.

buckeye1 said...

China has been "stepping on the breaks" for a decent time period now, raising interest rates and reducing credit availability. College students in China in the past few years have been graduating and then moving on to speculate on the stock market and real estate. The question in my mind is whether this translates into a major commodity market bust, as RE development in China and other emerging markets start to potentially fall off a perverbial cliff.

Dave said...

To me this looks like the rest of the world has learned from the American "flip-this-house invest $5k in a crappy sub-par quality kitchen to add $40k to the price tag" and make a quick buck without having to work a real job. You can only flip a house so many times adding 15% to its value before you realize that there are too few people with the wage increase to keep up. I'm glad this happened here, a house should be bought to lived in and as I look at all the half-built condos here in Chicago with 'For Sale' signs everywhere they can't even sell enough to build the darn thing and it adds to the eye-sore and makes it look like bombed-out London during WWII. That's a lot of lost labor and materials spending. All of the laborors I know here are busy working on fixing up multi-million dollar mansions in the suburbs and are happy to do it for a fraction of the cost just to get some work.

Sean said...

College students in China in the past few years have been graduating and then moving on to speculate on the stock market and real estate

buckeye1: Who on earth do you know in China that's doing this? How many college students could afford the 30% down for mortgages? How many could also afford the non-ARM payments? Where have you heard about this happening outside of tycoon kids?

Anonymous said...

to cadamyale:

I wonder whether investors factored their financing on an assumption that cap rates would go lower based on rising real estate prices?

to dave and stupid pf tricks:

You both might want to take a look at this article from Jonathan Karp at WSJ on Corus Bank's investment in condo development (you'll need a subscription to to read the article).

The "relevance" here is that if lenders are over-leveraged to commercial properties declining in value both here and in China, you have to wonder whether those same lenders will "close the credit window" to ordinary Americans like your kids when they want to buy their first home but can't because not enough credit is available to do so?

Just wondering, and I could be wrong in my analysis.

BTW, Jeff, in your last post, you mentioned Van Morrison. I was thinking of a popular Van Morrison tune with a catchy title that neatly summarizes the problems going on in credit markets for lenders tied to real estate - it's this.

Phillip Charles said...

Keen observations, as always. It does seem most odd that a story of such significance would be tucked away on C10. I mean, at that point why even run it? I know by the time I get halfway through section A, that sprightly Personal Journal has won over my affections. If it is all fluff, then I usually peruse B or C, but only if there is a creative caricature drawing on page one.

As an aside, I think the Olympics, as an international event, have drastically lost whatever panache they used to exhibit. Does anyone really care or watch anymore? The IOC completely screwed the pooch when they staggered the Winter and Summer, I think.

S Sams said...

Jeff, fundamentals of the chinese real estate market are not the same as the US. The US market is mostly mature and consequently the boom in pricing could only occur with an artificial stimulus. The Chinese market by contrast continues to exhibit the same fundamental drivers for demand that were in place five years ago. That is not to say that it will not undergo a cyclical downturn in sync with the general economy. It is also not to say that there are areas that are overheated and due for correction. To draw more profound comparisons between the Chinese market and US, is simply mistaken, although I realize everyone wants to look smart by trying to call the next bust...

Michael said...

Wait a China's oppressive totalitarianist government has rendered the economy's budding capitalist roots unstable? What, with all the currency manipulation, inflation capping and monk-beating, I lost track of how the heck those guys could EVER lose money!

I guess this means the days of printing money just by chain-belching the words "China etf, baby" aren't going to cut it anymore.

Ok. So, where's the last outpost for no-due-dilligence-necessary investmenting...hmmmm. Oh wait! I know! Commodities here we come! Those things always go up..."commodities etf, baby."

buckeye1 said...

Sean, to answer your question, I will ask another. How were construction workers and taxi drivers with $20,000 incomes in the U.S. buying and flipping real estate in the U.S. regularly? I have spoken with several different people who either live in China or know it well (ie traveled there several times) who have told me specifically it was quite ordinary for young Chinese to be speculating on real-estate and buying and selling houses or condos as their full-time job. The stock market phenomenon has been well documented, with several WSJ articles talking about barbers and taxi drivers in China putting all their money in the Chinese stock market, sometimes because the name of the company or ticker "sounds lucky." I also remember a datapoint that something like 1/4 or 1/2 (someone tell me if they know the number) of earnings from Chinese companies have been from stocks these companies own with corporate funds.

Tom said...

Jeff (or anyone), what have you heard about Dubai? One can only think that Dubai will come down much harder and faster.