Colin Bogar, Chair of CanCham Shanghai and Managing Director of MGI Pacific on real estate investment in China, government measures to keep it in check and common misconceptions about the real estate market in Shanghai.
Q: There has been much speculation recently about slowing real estate
markets in Shanghai, Beijing and other major Chinese cities. Is investing in
residential real estate advisable in the current climate?
A: For 1st-tier cities such as Shanghai and Beijing, the positive demographic
momentum in both markets will keep demand steady in the short term. The big
differences now are that double-digit annual price growth will be more rare,
with annual price growth moving into the single digits for the prolonged
future. In 1st-tier and better 2nd-tier city markets, I expect housing
prices in the medium end of the market to easily outperform the high end of
the market. In some 2nd-tier cities that have the perfect storm of less
favorable demographics and significant oversupply, especially in the upper
end of the of market, a long overdue market pricing correction should
continue leading to stagnant and declining prices in the near to medium
Q: How is the government dealing with the current real estate slowdown?
A: The government is being cautious, which is generally what the Chinese
government does. There’s been some downwards movement on interest rate policy,
as well as slight, favorable modifications to government-supported
mortgage programs and mortgage lending rules. Longer term, the government
recognizes that this period of price corrections should act as a needed
wakeup call to the entire industry and help bring more responsible capital
allocation to the sector. In other words, don’t expect much additional
stimulation for the sector.
Q: What are the main factors currently influencing property prices in
Shanghai? Are they similar to those factors influencing other cities?
A: Prices in Shanghai are driven by a number of factors. On a macro level, strong demographics and buyers moving into larger/improved housing conditions continue to drive the market. On a micro level, proximity to schools, transportation, and surrounding amenities are the main price drivers. Specifically, distance to new subway stations and proximity to the
new Disney theme park and Free Trade Zones have been drivers of above
average price growth in 2014. With the exception of demographics, which
differ from city to city, the other conditions would be similar. For detailed information on how Shanghai compares to other cities in Shanghai or China, Property Passbook is a good resource.
Q: What is a common misconception about real estate investment in China in
general, or in Shanghai in particular?
A: One obvious misconception by local buyers is that prices will always go up.
This is the first significant price correction a lot of people have seen,
but most buyers still think it’s a temporary blip on the radar. Time will
obviously tell, however I still believe that the expectation for significant
future price increases is still far too positive. In Shanghai, I think the
biggest misconception is the superiority of the city center to suburban
markets. In my view, especially given the continued expansion of the subway
system, I strongly believe that suburban markets will outperform—on a percentage
basis—downtown areas, as the price gap seems far too large.
Q: What effects will the real estate slowdown likely have on other sectors
of the Shanghai economy?
A: The larger global effect of the China real estate slowdown is one of the
main drivers of the current decline in global commodity prices. In
Shanghai, I’m not sure the decline will have much effect on the broader
local economy. To begin with, the slowdown here will be less pronounced
than other cities. Secondly, most of the construction workers are temporary
migrant workers. Service providers like real estate agents and renovation
companies as well as furniture and appliance retailers that are highly
correlated to real estate will see a decline but I can’t imagine anything major beyond that.
About Colin Bogar, Managing Director
Mr. Bogar is a graduate of the Ivey School of Business at Western University from where he obtained his HBA and MBA degrees. He is the Managing Director of MGI Pacific in Shanghai and has held a variety of leadership positions in the commercial real estate industry. Mr. Bogar is often quoted in the Wall Street Journal, Financial Post, Global Times, and many other leading financial publications on topics related to China and the global real estate market. Mr. Bogar believes strongly in the importance of corporate responsibility and holds several leadership positions as both a Director for the Ivey School of Business and as the Vice Chairman of the Canadian Chamber of Commerce in Shanghai. He has lived in Shanghai for over 7 years and speaks fluent Chinese.