When you get Ajisen Ramen going into property as well as textile company and semi conductor company, you should be very very wary.
It is always when every one throws away any thought of risk management and go with the flow thats when you know you are near overbought levels.
One is a Chinese state tobacco company. Another, a Japanese ramen chain. And finally, an obscure Hong Kong semiconductor manufacturer.
What they have in common: They are the latest companies to jump on the real-estate bandwagon as prices soar in Hong Kong and mainland China. For some experts, they are also troubling evidence of froth in both property markets.
Last week, a small manufacturer of diodes and transistors called Sino-Tech International Holdings Ltd. stunned investors by announcing that it was “diversifying into the property sector,” buying a luxury three-story residence in Hong Kong’s swank Peak district for more than 280 million Hong Kong dollars (US$36 million) in cash, one of the biggest sums ever for a property here.
Sino-Tech wanted to take advantage of “a good investment opportunity” and “diversify its income base,” the company said, but shareholders were unimpressed, shaving off about a quarter of the company’s market capitalization in two days.
That made Sino-Tech the latest in a string of companies large and small, state-owned and privately run, that are piling into Hong Kong and mainland China’s property market—despite no demonstrable experience in the sector.
Hong Kong’s small and open market has long made it one of the region’s most volatile, while mainland China’s relatively immature market is still prone to wild price swings and policy risks. But historically low borrowing rates and large government stimulus packages have brought a rush of relatively unsophisticated latecomers into the real-estate market in search of easy money.
Regulators and market players worry that these investors are pushing prices to irrational levels, plunking down sums of money that better reflect their ability to tap deep wells of liquidity than solid market fundamentals.
For instance, office values have held steady in cities like Beijing and Shanghai despite vacancy rates of about 20% and a drop-off in rents by as much as 40%. In February, official numbers show that residential-property prices in 70 major Chinese cities rose 10.7% from the same period a year earlier, the fastest pace in years.
In Hong Kong, property prices are back to where they were during the city’s biggest bubble, a speculator-driven run-up that burst with dire consequences during the 1997-1998 financial crisis. In recent months, a series of record-breaking transactions in Hong Kong’s luxury residential market has forced nervous officials to clamp down on mortgage lending.
A provincial-level subsidiary of China’s state-owned tobacco monopoly company is building one of the highest-profile skyscrapers in the southern Chinese city of Guangzhou, while the Chinese branch of Ajisen Ramen—a popular noodle chain whose logo features a winking girl holding up a steaming-hot bowl—is now a Shanghai landlord, having paid US$19.6 million for 2,601 square meters of office space in a top-grade downtown skyscraper. Ajisen called the purchase “a good investment opportunity for the group to broaden its asset base.”
Citibank analyst Oscar Choi has tallied up entries to the property market from almost every sector imaginable: oil, textiles, manufacturing, commodities, and even a state weapons manufacturer. China’s biggest insurers have also been major players in the industry. In January, China Life Insurance Co. became the largest stakeholder in Hong Kong-listed Beijing developer Sino-Ocean Land Holdings Ltd., with a 24% stake.
Some experts have pointed to Japan’s 1980s real-estate bubble as a precedent, when bakery owners and other relatively unsophisticated investors were jumping into the market with splashy purchases that backfired when prices collapsed. In that case, property prices rose with little regard for fundamental metrics, such as rental yields, with purchases justified purely on the basis of the expectation of capital appreciation.
The situation may be even more extreme in China now, because Beijing’s tight capital control regime keeps excess cash bottled up domestically, limiting investment to either stocks or property.
Fan Wei, chairman and executive director of Hong Kong-listed Shanghai Forte Land Co., vented his frustration at the number of interlopers in the real-estate market at a news conference last week, calling on the Beijing government to restrict competition from corporate dilettantes.
“These days, you see all these companies that produce clothing or make computers flooding into the property market, thinking they can do it just as well,” Mr. Fan huffed, saying inexperienced players added to market instability.
In recent weeks, central leaders have talked tough on reining in soaring property prices and have punished developers who buy up land only to sit on it, apparently waiting for market conditions to improve before developing and marketing the land. Officials blame land hoarding for depressing supply when prices are low, creating upward pressure on prices.
Last Thursday, Beijing’s State Assets Supervision and Administration Commission ordered all state-owned enterprises with no core business in the real-estate sector—some 78 by its count—to get out of the property market. On Monday, SASAC, as the body is known, gave the companies 15 working days to present their plans.
State-owned enterprises, lured by the promise of fat returns and easy access to bank financing, were the most active players in China’s land-auction market last year, accounting for 60% of land purchases by dollar amount, according to Citibank. That helped land prices double in 2009, according to Standard Chartered Bank.
Potentially lucrative profit is a key motivator, too. Top residential-property developers can generate average net profit margins far in excess of 20%, and the business is seen as a relatively simple one to enter as a developer or investor. But public anger has risen over the use of state money to push property prices beyond the reach of ordinary citizens.
State-owned enterprises have been known to flout central government directives in the past. Enforcement of such measures outside China’s largest cities is spotty at best, and state-owned enterprises are only one part of a broader trend that includes companies without state backing, and even wealthy individuals.
He Yuxin, a research analyst at Dragonomics Research & Advisory, said Beijing’s latest move is “unlikely to succeed,” since SASAC “has little real power” over the state companies it supposedly controls.
Still, the effort has generally won praise. “Goodbye to land kings,” Bank of America-Merrill Lynch analyst Christie Ju wrote in a note to clients, referring to companies that pay record prices for plots of land. Ms. Ju said she expected land prices to fall with fewer of these players in the market.
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