China's Building, but Will They Come? The Space Race

As I mentioned in a previous post, there has been a lot of recent media attention focused on the building boom that has been taking place in China, and some observers have jumped to the conclusion that it’s unsustainable. I felt this topic warranted further discussion. We certainly are not seeing 12 to 20 cities the size of New York going up in China, so it’s important to keep things in perspective. It is true that there is a construction boom in China, but that’s mainly because there is a shortage of quality housing and office buildings. It is also true that some projects are big, and not all buildings are occupied all at once. Some buildings are likely to be filled as soon as the occupation permits are obtained. Based on those realities, it’s easy to see that such large developments (“cities”) may be temporarily empty. I wanted to see for myself what exactly was going on, so my team and I embarked on a tour of some new developments in China. Here is my account.

Ghost Towns – or Growth Towns?

We drove to the Yantian District of Shenzhen to visit a very successful property developer. I was amazed to see an impressive modern building that I later learned was designed by the American architect, David Hall. The building is surrounded by a lake and is divided into various sections containing office space and a hotel. It also boasts environmentally friendly features, including solar panels on the roof and adjustable blinds on the window to control the incoming sun’s rays. In the lobby, there was an indicator showing how many kilowatts of power the solar panels produce. We learned that on a sunny day, they could potentially generate 100 kilowatts.

We had a lively discussion with the developer, including the issue of “ghost cities” in China. From their perspective, sales were robust, with particularly brisk business in fully furnished apartments. In 2012, the company presold 13.5 million square meters of property and of that, 12.9 million square meters should be completed in 2013. (They have a conservative policy of recognizing sales only when the project is completed.) So if there is a bubble there, they (and we) didn’t see it. We did see continued demand.

The Space Race

My team and I also recently visited Guangzhou, a city that is fast becoming a concrete jungle amid a building boom. I was amazed at the number of high-rise buildings going up and already completed in the city’s new financial district. My team and I stayed at an ultra-modern hotel with the reception area located on the 22 floor, giving us a spectacular view of the city. Almost everywhere we turned to admire the view, we’d see buildings sprouting up and towering above the rest, like trees reaching for the sun.

Guangzhou’s new central business district has a well-planned central green strip—a wide swath of land running from its TV tower with its multicolored lights situated on a man-made lake, down to where our hotel stood. The green strip was lined with high-rise office buildings, shopping areas, concert halls and theaters. One particularly striking concert hall looks like a Martian space ship with black and grey walls and windows.

We wondered if all the tall buildings going up in Guangzhou would be occupied and if there was enough of a market for that much space. But in China historically, it seems that if you build it, they will (eventually) come. I remember when farm fields dominated the Pudong area of Shanghai, and we were shown a plan of a proposed city with numerous high rises, parks and other facilities. At that time, we thought it was a pipe dream that could never be fulfilled. Now that dream has become a reality in Pudong. I think a similar fate could be in store for Guangdong’s new office areas; there may be a few growing pains, but eventually, it appears they could become fully occupied.

Of course, when a country has been growing as fast as China has, investors often have little patience. Any missteps or miscalculations can come with painful consequences. As long-time investors in China, my team and I continue to look for opportunities there. And we plan to continue doing our own on-on-the ground reporting, too, to read between the lines and see what's real.

Important Legal Information

Dr. Mobius’s comments, opinions and analyses are for informational purposes only, may change without notice, and should not be considered individual investment advice or a recommendation to invest in any security or to adopt any investment strategy. Information contained herein is not a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets' smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets.

Investing in real estate securities involves special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector.

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