Fears About a China Housing Crash Overstated

Consensus among international media is that China’s economy is heading for an imminent and disastrous crash due to its inflated housing market. While there is absolutely no denying that housing prices in central parts of 1st Tier cities such as Beijing, Shanghai and Guangzhou are sky-high, this does not signal the end of China’s economic rise. If anything, the high price of housing in these cities affirms China’s rise from poor, cut-off backwater to the world’s second largest economy.

The New York Times weighs in with a Room for Debate feature on ‘China’s Scary Housing Bubble’. The debaters agree for the most part that even if growth slows, the slowdown in residential construction activity will not spell the end of China’s economy. Michael Pettis, professor at Peking University, offers a more likely scenario:

“The real risk for China, it seems to me, is not a property-led financial collapse. What is more likely is that at some point – and probably not this year or next – we begin a long process of adjustment in which economic growth slows dramatically as the economy grinds away at the overbuilding and at excess debt

For now China is just trying to catch up to developed world standards and keep its economic engine running while the domestic economy evolves into something more service-oriented and consumer based. That will take time, and until then, construction of new buildings and infrastructure will continue.

Land Reclamation and the Future of Hong Kong

Land reclamation is a controversial approach to urban planning wherever water-bound cities are land-strapped for new development. In the U.S., a place like San Francisco is a prime example of a city where much of the adjacent waterfront was ‘reclaimed’ from the bay and land-filled to make room for new buildings.

In Asia, Hong Kong practices land reclamation to accommodate large structures such as its convention center and Chep Lap Kok Airport. A piece from Metropolis magazine takes a closer look at reclamation and urban renewal in Hong Kong and how it is impacting its most prized asset: Victoria Harbor.

Metropolis: From Reclamation to Renewal

Shifting Real Estate Development Priorities

Last week I had a chance to chat with Russell Flannery, the Shanghai bureau chief for Forbes magazine, at a conference I spoke at in Luoyang, Henan Province. I talked to him about the shift in real estate development focus in China from residential to the retail and commercial sectors. Below is a reproduction of the interview from Forbes:

Shopping Malls Become China Real Estate Hot Spot As Economy Shifts

Shopping malls are becoming a China real estate hot spot as government efforts to ease housing prices reduce interest among developers in building apartment complexes.

So says Adam Mayer, a USC-educated senior project architect based in the western Chinese city of Chengdu for Cendes, a Singapore-founded architecture firm with projects in more than 20 Chinese cities.   Rapid growth in Chinese retail spending, he says,  “represents a shift of the Chinese economy from one of production to a more domestic, consumer-oriented market.”

I talked to Mayer on the sidelines of a conference about the business outlook in central China held yesterday in Luoyang, one of China’s ancient hubs. The event was being organized by Forbes China, the licensed Chinese-language edition of Forbes magazine, and the city government, and attracted speakers from IBM and GE. Excerpts follow.

 Q. China’s government seems to be slowing down the pace of the real estate industry right now. To what extent do you feel any of that in your own company?

A. We do see it in the sense that there’s a shift away from such rapid development of residential property. Not all residential types, though, just, specifically, the high-rise clustered residential you see in all cities across China. The shift is more toward villas, which in the U.S. we would call detached houses. These are not intended to be primary residences. Rather, they are intended and marketed towards wealthy individuals who want a second home or a vacation home that’s outside the city.

What we’re seeing now is a huge growth in the retail sector in the design and developments of shopping malls, especially in Chengdu where we have a lot of work, and also in Kunming, the capital of Yunnan Province. We’ve been seeing a lot of mixed-used developments in the planning phases now. These are typically 4-5 storey retail shopping malls (that) in architectural terms we call a podium. These are usually high density sites. They have high floor to area ratios, which are zoning numbers that tell you how much square meters you can build on that site. These are usually in center city areas, and also around the second or third ring roads that are developing out from the center, typically around transit hubs where there might be a subway station. There are retail podiums with office towers, or it could be a hotel tower and also some residential tower on top.

Q. What’s driving that investment?

A.  I think it’s really more about retail. The developers are maximizing the FAR (floor to area ratio), and that’s why they’re building towers on top, but the retail really represents a shift of the Chinese economy from one of production to a more domestic, consumer oriented market. So we see real estate developers really pushing hard (on) the retail development.

Q.  In the old days, Chinese developers were making plenty of money just by building those tall residential buildings and selling them out quickly. Now, those same builders appear to be increasingly interested in commercial property. Do you see signs of that?

A. For sure. If developers are only in the residential sector, they definitely need to diversify. Also, when it comes to geographical development, (there’s a) shift of development of China moving from the coast inward (and) west. We see that happening to even further west than Chengdu, and, if you can imagine, into Urumqi and Xinjiang Province.

Forbes: Shopping Malls Become China Real Estate Hot Spot As Economy Shifts

How China’s Megacities Have Avoided Problems of Other Developing Cities

Urbanist media can’t seem to get enough of the megacity these days. Much of the commentary surrounding this topic is disconcertingly celebratory about these leviathans despite such phenomena as overcrowding, high levels of congestion and sprawling slums.

Yet absent from most of the commentary is any mention cities in China. This is perhaps due in large part to the lack of serious social problems in comparison to its developing city counterparts in other countries. If a megacity is defined as a city with a population of more than 10 million, then China is home to 5 megacities: Shanghai, Beijing, Shenzhen, Guangzhou and Dongguan. As the country continues to urbanize, more Chinese cities are bound to join the ranks of these megacities.

How has China been able to avoid the pitfalls facing other developing megacities? No one is denying that Chinese cities don’t have problems including unequal income distribution, pollution and growing traffic congestion. Yet China’s megacities seem to have largely avoided social dangers such as violent crime, disease and slum proliferation that plague urban areas of other developing countries.

Following I have identified five points as to how China’s cities have avoided these issues:

1. Construction of New Housing Units

Western media continues to bawl over the amount of new residential construction in China, calling it the ‘biggest bubble ever‘. I have pointed out before how this might be an overestimation of the problem and that the housing market is actually more stable than many think. One thing is clear: the ample construction of new housing units in cities across China remains the essential component leading the way in the country’s development. The ability to provide modern accommodations for millions of aspiring urban dwellers has also directly prevented the proliferation of slums and large-scale shantytowns.

2. Development of Public Transportation

The ability to move efficiently through an urban area is paramount to opportunity and quality of life. When one thinks of megacities such as Jakarta or Mexico City, automobile gridlock often comes to mind. Beijing might have its traffic problems as well, but China’s development of public transportation, including extensive underground subway networks, ensures citizens will have other options to move around besides motor vehicles. The more connected by different forms of a transportation a city is, the more opportunity people have to live where they want and have access to a wider geographic range of job options.

3. Land-Use and Zoning Flexibility

The often-overlooked reality of zoning and land-use regulations plays a much greater role in the shaping the character of megacities then it is given credit for. Mumbai’s draconian 1.33 floor-to-area ratio (FAR) throughout most of the city means that it is limited to construction of low-rise buildings, leading to the growth of overcrowded sprawling slums. Chinese cities, in contrast, allow for high FAR, promoting construction of high-rise buildings that leave room for ample green space.

Furthermore, Chinese cities are not limited by ‘urban growth boundaries’ and allow development to occur on newly annexed land outside of traditional urban cores. Even traditionally ‘dense’ cities like Shanghai and Hong Kong allow for new development outside of their traditional centers: the Pudong New Area in Shanghai and the New Territories in Hong Kong are huge areas that are still largely underdeveloped when compared to their respective downtown areas.

Critically, these nominally suburban or even “exurban” expansions are not mere bedroom community; they are frequently attached to areas of intense commercial, industrial and technical development. In many cities, including Chengdu, where I reside, most of the new economic growth takes place in such communities.

4. Providing Economic Incentives with Special Trade Zones

As China enters its third decade of rapid development, competition is heating up between its cities for domestic and foreign investment. The winners will ultimately be cities that are most business friendly and offer incentives like tax breaks to companies looking to set up operations. Many of China’s cities have gone about this by establishing special ‘economic and trade zones’, usually outside of traditional urban cores. As a matter of fact, one of new China’s most economically successful cities, Shenzhen, largely started as a ‘Special Economic Zone’ (SEZ). Special economic and trade zones that are not actual cities, but part of a larger city, thrive because they usually built on more affordable land on urban peripheries, opening up more investment for construction of state-of-the-art manufacturing and R&D facilities.

5. Willingness to Learn from Outside Experts

When it comes to political issues at the Central Government level, it is clear that China does not want to be told how to run its country by outside diplomats and foreign policy experts. Yet at the municipal level, Chinese government and business leaders are earnestly open to listening to experts in planning and development from outside its borders. One only needs to take a look at the countless architecture and urban planning practices from the West, Singapore and even Taiwan who currently work in China. This open exchange of ideas taking place is what allows best practices to come to fruition.