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Concrete jungle cements potential for developers' profits
AS famed psychologist Abraham Maslow argued, shelter is one of man's most fundamental needs. Trying to satisfy that need for the 1.38 billion people in China is definitely no mean feat. Furthermore, the desire to upgrade and accumulate investment assets should keep demand for real estate in major global cities growing over time. Perhaps then, investing in a Chinese developer would appear to be a potentially attractive proposition. However, developers differentiate themselves by positioning their land bank to achieve a desired level of exposure to certain provinces or cities. From an investment point of view, which regions bear the most potential, and which developers would stand to benefit?
With a growing middle class and sturdy economy, it's fairly inevitable that China will see increasing urbanisation. In our view, key city clusters should benefit from this trend, as many look to seek their fortunes in the nation's concrete jungles. Five major city clusters in China should comprise 50 per cent to 60 per cent of the country's total population in the next 20 to 30 years, according to a report published by the Boston Consulting Group and the China Development Research Foundation.
It comes as little surprise then that the urbanisation rate in the Beijing-Tianjin-Hebei region and the Yangtze River Delta, despite starting from a low base before the turn of the century, rose to 63.9 per cent and 70.5 per cent respectively as of 2016, surpassing the national average of 57.3 per cent.
One of the key city clusters slated for strategic transformation is the Greater Bay Area (GBA), comprising Hong Kong, Macao and the cities of Guangdong's Pearl River Delta. The region is home to less than 5 per cent of the country's population but contributes almost 12 per cent of its GDP. By 2030, the GBA is expected to assume a leading role in advanced manufacturing, innovation, shipping, trade and finance, and is envisaged to emerge as a formidable rival to the other bay areas around the world such as New York, San Francisco and Tokyo.
Whether by chance or design, the 11 cities of the GBA already possess the attributes necessary to create a successful economic powerhouse. Hong Kong boasts world-class financial and professional services industries, Shenzhen houses high-tech innovation, while Guangzhou possesses a robust manufacturing base. The policy intent is simple enough to understand - full integration across the region would allow cities to leverage comparative advantages and extract synergies in order to create an economic and technological hub. The challenge, of course, is how.
We believe that the key enabler in creating such an ecosystem lies in infrastructure connectivity. Efforts are already under way to improve the transport infrastructure within and between cities, thereby making inter-city transport more convenient. This will help to foster market integration, which would encourage residents in Hong Kong and Macao to invest, establish businesses and take up employment in Guangdong. It also provides residents from both Special Administrative Regions with more convenient conditions to live on the mainland.
Perhaps nothing demonstrates the government's ambitions better than the Hong Kong-Zhuhai-Macao bridge. When opened, it will be the world's longest sea-crossing bridge with a dual three-lane carriageway. Other initiatives include the Guangzhou-Shenzhen-Hong Kong Express Rail Link, which could shorten the travel time between Hong Kong and Guangzhou from 100 to 48 minutes, while the Shenzhen-Zhongshan Corridor could cut the travel time from Shenzhen to Zhongshan from around 2-3 hours to 30 minutes.
The implications for property prices are clear enough. Key hubs of economic activity such as Guangzhou, Dongguan and Shenzhen should see residential prices keep in lockstep with economic development. Prices in satellite cities are also expected to trend steadily. The current core-satellite price disparity within the GBA remains stark, with the average selling price in Zhongshan at about 18 per cent of that in Shenzhen. However, we believe that the completion of projects such as the Shenzhen-Zhongshan Corridor in 2024 should help to narrow this gulf. Supported by healthy end-user demand and ease of transportation across cities, it would be reasonable to expect a broad-based increase in property prices across both core and satellite cities in the GBA.
Seismic transformations are under way, and the recent market correction presents an opportunity to participate in the next chapter of China's growth story. With an estimated 33 to 41 per cent of their land bank situated in the GBA, developers such as KWG Property and Agile Group should look to benefit from favourable developments in the region. We are also constructive on these developers, given their healthy level of contracted sales for 1H 2018, as well as undemanding valuations. Furthermore, a re-rating for the shares of these developers might be on the cards, as detailed plans for the GBA could soon be announced.
While rap artist Jay-Z's lyrics were written with New York in mind, one cannot help but imagine that the GBA would also, one day, be a concrete jungle where dreams are made of.
- The writer is an investment analyst at OCBC Investment Research