Is Chinese real estate too hot or needed more investment?

Some of my friends are trying to buy house in my city—Shenzhen, which is possiblly the most serious housing foam is. However, so far, no official approve and no one can ascertain that China’s housing market is in danger.

Compared with western and other developed markets like U.S, China's real estate industry is less experienced and immature. Currently, there are approximately 25,000 real estate brokerage agencies employing over 200,000 agents. In addition, an estimated 20,000 property management companies employing over 2 million people exist in China. Many of the brokerage companies, however, may not possess business licenses and qualification certificates. For instance, it was reported that, of the 4,000 real estate agencies currently operating in Beijing, only about 700 have business licenses.10 In a recent inspection in Shanghai, 982 real estate brokerage firms were found guilty of operating without registration with the appropriate government agency.

During the middle and late 1990's, real estate markets in big cities were overheated. Price of prime land in Beijing has fallen from the highs experienced in the boom development period of the early 1990s. In 1999, the vacancy rate for Grade A buildings was 30% in Beijing and 38% in Shanghai. Some experts estimated that the vacant space might take two to three years to be absorbed if the recent trends in demand continue. The market now seems to be picking up the momentum when many residents are upgrading into bigger housing.

A research report by Shanghai Real Estate Economic Association for the preparation of WTO entry cited that, in comparison with companies in developed countries, China's local real estate companies have the following weaknesses: 1.Lack experiences because of short history; 2. Limited competing capability due to smaller sizes; 3.Insufficient capital and backward marketing means; 4.Lower management skills; 5.Not service-oriented in general.
To regulate the market and protect consumer's interest, the government released the revised Model Commercial/Commodity Housing Purchase/Sell Contract in September 2000. The model contract serves as a standard contract and allows potential real property buyers and sellers to understand what are involved in a real estate transaction. The government hopes it will eventually help consumers reduce the risk in home purchase.

The overall real estate market in China is dynamic and grows fast in terms of capital flow and development speed in spite of the problems. The resale housing market is almost nonexistent in China a few years ago. In 1999, the government completed its basic policy for secondary housing market and encouraged urban residents who owned their homes to sell smaller, older, and low-quality houses in exchange for bigger, newer, and high-quality ones. Some cities, e.g. Shanghai and Ma Ansan of Anhui province started to experiment the secondary market earlier than other cities in China. Since 1996, there have been 67,333 residential properties being put for sales on the market in Shanghai, accounting for about 5% of the total sold properties there in the same period. In 2000 alone, about 7.5 million square meters (80.73 million square feet) existing houses were sold in Shanghai. The total transaction amount was valued at RMB 65.6 billion (about U.S. $8 billion).11 There are over 5,000 foreign funded real estate companies, including China-foreign joint ventures (JVs) or cooperative enterprises, and over 1,000 wholly foreign-owned companies currently operating in China. Hong Kong is the top investor, accounting for over 75% of total foreign investment, followed by the United States and Taiwan.12 The following chart shows the amount of total foreign investment in the Chinese real estate market in recent years. There was a drop in investment in 1997 and 1998 that could be attributed to the Asian finance crisis and over heating of the real estate market in late 90's.
According to a survey reported in the China Construction magazine, about 59% of the urban residents in China now own their own homes. The average living space for most of urban residents who own their homes is 50-80 square meters (538-861 SF). The majority of households surveyed have 2 to 4 people. About 19.7% of respondents live in rented dwellings and 11.5% receive rental subsidies from their employers or work units. It was also reported that 21.9% of the residents surveyed indicated they would like to purchase new houses with a size of 70-150 square meters (754-1615 SF) within 5 years. Family savings were the main financing resources, which stood at about 6700 billion RMB (1 trillion U.S. dollars in 2000. However, government funding and bank loans were also among favorite options.