URSABLOG: Future City

Down in Future City, the wonderfully named new development in Yueyang, Hunan Province, trouble was brewing. Despite having sold a large number of apartments at 10,000 yuan per square metre, there were still unsold units in the tower complex. In order to shift them, the owners, China Evergrande Group, the second largest property developer in China by sales, decided to drop the prices to 7,000 yuan. Logical enough you would have thought, except the original buyers were now down on their original investment by anywhere between US$ 40,000 and US$ 60,000 on their original investment.

The original buyers were naturally unhappy by this development. So, two weeks ago, a large group of them descended on the Future City sales office, holding banners and demanding an unconditional revocation of their original purchase contracts. A logical enough reaction to being undercut to the tune of 30%: hell hath no fury than an individual investor in residential property being told that their investment was not only going up, but could also go down as well, as any reader of the Daily Mail will know. This reduction was, however, admittedly in rather a heavy handed and dramatic fashion.

Even more heavy handed and dramatic was Evergrande’s response. They called in around twelve ‘thugs’ (I assume they meant crowd control and security) to ‘beat up’ (I suppose meaning disperse) the angry customers. A nice detail was a sales consultant enthusiastically joining the fray on the side of the thugs. Not content with screwing their clients, they wanted to physically abuse them too.

There are many lessons to be learnt from all this. One is the strange way that Chinese culture has difficulty in dealing with market turbulence. The original buyers think they have been swindled by crooks, the sellers do not help themselves by behaving like criminals themselves. Tolerance, forethought, and PR are all needed here on both sides. Another is the way how one big idea seems to encapsulate the whole of the economy and its prospects.

China, the most important developing economy in the world, is closely watched for signs of good and bad health. Import and export figures, GDP predictions and results, industrial production sentiment and statistics are closely parsed and pored over to give some sense of what happens next. Especially to those of us in shipping with memories back to 2002-2003, we are determined not to miss, as I discussed last week, the next big wave, or to leave ourselves exposed when the tide goes out. This is despite the fact that statistics in China are notoriously unreliable, and that China itself has said they want growth to decline gradually to below 6% so they can continue to build sustainably. So when Chinese GDP growth dips below 6% we react with horror (remember the good old days with 10% plus!), without remembering that 10% of 100 in 10, but 6% of 200 is 12. What I mean is that the Chinese economy is so much bigger and complex than it was ten years ago, that in terms of volume, the numbers are still good.

There is also a difficulty of those of us in the west to really understand what is happening on the ground in China. There are not as many visits to China on business these days (newbuildings are slow, secondhand deliveries take place in Hong Kong and Singapore, where charterers and traders are based too), so it’s difficult for us to understand what is really going on. In my last visit to Shanghai about three years ago I was struck by how rough and tough Shanghai had become, so much more in your face. It is not so much the rise of nationalism that has done this I suspect, but the rise of urbanism. A new aggressiveness is needed to hustle and survive, and the residents of Future City had indeed seen the future, seen it had not worked for them and were willing to take matters into their own hands. Unfortunately for them, the muscle was hired to make sure they could not succeed.

You may well ask what I am doing wasting my time reading about property disputes in obscure parts of China. Well I had been drawn the article by this rather grandiloquent headline:

China Evergrande Slashes Price of Condos as Chinese Real Estate Boom Hits Bottom

A number of questions sprung to mind. Who or what is China Evergrande? And how does a boom hit bottom? I am now informed on Evergrande, I’m still not sure about this boom bottom thing. But if I am to be honest with myself, and you, I was drawn to it because housing is weirdly one of those things in the China narrative that we want to know about: construction is good for steel and cement, and consequently dry bulk shipping; a booming property market increases cash in the economy, and drives trade. It can also be a sign of the unseen hand of the state stimulating parts of the market we cannot reach. And so on. And I fell for it. But I don’t feel cheated, I still have the image of a bunch of people marching to a sales office and then getting beaten up by the company that sold them the flats, an image which is weirdly amusing and compelling at the same time.

More than that however, it brings me back to the question that revolves around my head a lot at the moment – is now a good time to buy dry bulk carriers? The answer remains yes, as long as the price is right. It is not right in certain sizes and specifications. But I do think that ten year old handies built in Korea and China (the usual rules about yard, supervision and equipment apply) are a good bet, as well 10-15 year old LME panamaxes. But future earnings depend on what happens in China and elsewhere, and how the geopolitical winds that are blowing around the world change course.

I will write next week about how I have changed my mind, a little bit, about predicting changes in the market, but let me say for now that on balance next year will produce a better dry bulk freight market than this year, so yes, now is the right time to buy, the right thing at the right time.

But, unlike the hapless residents of Future City, please buy what is already in the water and moving around, rather than be tempted by newbuildings. This is not because I want to keep supply slow and predictable, or that I am jealous of newbuilding brokers, but simply because the pricing today is not right, and as the orderbook decreases so the demand for new orders increases. There are technical challenges too, too many to mention here, at least for now.

Shipowners are mature investors - at least I like to think they are - and they know that when the market turns against them they cannot march down to their local ship sale and purchase brokers’ offices with banners and protest, and demand a revocation, or refund. Come to think of it though, many did in 2008 and 2009, but nothing was forthcoming, at least not without a legal battle or by paying to get out of it. Most buyers at that time realised that it was their decision that had led to the investment, and caveat emptor is not just a legal concept but a philosophical one too.

But as the investors in Future City nurse their bruises and their battered bank balances, I wonder whether the name of the development will change in ten years time. Cyclical Towers? Sunk Cost Estate? I can offer them some words of comfort, they won’t be the first and they won’t be the last.

Simon Ward

www.ursashipbrokers.com