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What China and Japan mean to the overseas investor

By Adam German

The word is out there and strong in the land of the rising sun; the Chinese are buying everything they can get their hands on.

With China’s rise last year to become the No. 2 economy, displacing Japan who had strongly held that position after the United States since 1968, along came with it the fear-laced hope that China can save Japan from the doldrums of deflation and faltering asset prices.

For an investor outside East Asia, it is easy to set the cross-hairs on China amidst all the hoopla about a rising economy, a red hot real estate market and sky-rocketing GDP figures. Where does that leave Japan? According to the mass media, lost in the Gobi apparently.

However, upon closer look, this might not be the case. Despite being the No. 3 economy, Japan is still seen by investors as the most stable East Asian economy to invest in. What most investors are doing is using Japan as a risk hedge against the potential (and some say inevitable) wild gyrations that could plague the current Chinese economy.

When talking to agents in Tokyo, everyone seems to be firmly seated on the bandwagon labeled “China.” Agents pine on about how they wish they could do more business with China but can’t figure out how. Advertising Japanese property in Chinese publications won’t do any good, they say, as the agency cannot handle a Chinese inquiry. This leaves our starry-eyed agents left wringing their hands with slumped shoulders uttering “Do-Shio” (meaning: What should I do?)

If you stop and think about it for a second, China might not be all that it’s cracked up to be.

First; bandwagons in general. If one exists and everyone is jumping on it, it’s too late. You’ve missed your chance at winning big. In China’s case, sure you might score a couple of deals here and there, but you won’t score big the way you are expecting if the bandwagon is already crowded with a line of people anxiously waiting for someone to fall off. When a bandwagon gets a certain amount of momentum, the only way it can stop is by crashing hard with everyone on it. This is a fact of life.

Second and more specifically; the Chinese government announced last week that all loans for property developers will be suspended in an effort to cool the overheated real estate market. A recent article by the Daily Yomiuri illustrates why. Developers have been buying up cheap land wholesale in an effort to drive up prices by reducing supply. These developer’s refusal to sell is taking a large part in the bubble creation mechanisms found in the current Chinese real estate market.

Third; I have heard from agents on the ground in Tokyo who have been to China scoping out developments being flogged as genuine. In many cases I have heard the same story; marketing material about the development heralding great returns that can be made by investing in the project. These materials explain that tenants, the likes of Louis Vuitton, Prada, Gucci et al, have signed long-term leasing contracts to show their wares in this sparkling new facility.

When Japanese agents go to China to see these wonder developments, they are indeed tangible brick and mortar. However, the rent roll is shorter and much less glamorous than advertised in the investment materials. One Japanese agent I know went to a 200-unit shopping center to find only one tenant; ironically it was a Chinese restaurant.

The Chinese government see the lemming investment mentality combined with domestic land gobbling practices and is working hard to fight against it. China is well aware it is still a fledgling capitalist economy. The government’s current actions illustrate they are trying to head off the obvious bubbles that threaten the path to prosperity. However, as is the history of any bubble, be it real estate or technology, by the time the government realizes what they are dealing with, it is usually too late. The bubble is too far gone to control and must be ridden out to the end.

This spells a lot of uncertain times ahead in the near future for China which is where Japan steps in. Japan still offers 7-8% gross returns as the norm. Japan, having gone through bubbles and crises in the past, has the experience to keep itself stable despite turmoil in the market place. If you are looking to win big in the Wild East, then make sure you shore up your base in Japan. Only then head into the rougher (but potentially more rewarding waters) of China.

© Japan Today

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Great article. China will eventually implode, and then it will surely be a huge mess.

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On a side note a real estate friend of mine told me that many Chinese are now buying up any and all Japanese real estate they can get their hands on. They have purchased lots of mountainous land in Hokkaido and now are looking towards Honshu. Not sure what the end game is, but at least someone is buying outside of Tokyo.

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Boring real estate article, aaaaaaaaaaaagghh snooze. 7-8% rtn in Jpn, eh maybe but yr more likely to be on the loss side for the time being

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Immediate 7-8% ROI is about average, providing there are current, paying tenants. But the occupancy ratio outside of a few popular core areas is not climbing. This country, I believe, still has a couple more years of ground-level recession in it.

Lots of empty commercial properties here in Japan, too. The difference from China is that the vast majority of empty commercial space here is over twenty years old, not newly built developments.

It goes without saying that even moderate capital gains in asset-flipping are a looong way away. Chinese investing here are definitely in it for the long term, methinks. Must pray their economy holds up, or there will be a mass selloff when they need their money back.

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China has been the only country in the world with a double digit growth rate for the past 2 years, hence, China alone saved the world from entering into depression.

If China implodes now, it will usher in the next global depression. The real estate bubble they created is VERY risky; lets hope that they engineer some kind of soft landing.

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"...Really? There were, a few months ago, 64.5 million urban flats that showed no electricity usage for six consecutive months. That’s one in four city apartments, enough housing for some 200 million people. The value of vacant apartments held by speculators is about 15% of gross domestic product..."-Gordon Chang/Forbes

This is what happens when the country's money supply is 260% of GDP while at the same time trying to sustain relatively miniscule % of consumption/GDP ratio (35%) and a large investment to GDP ratio (46%). China's policy is equivalent to building a high rise in middle of the desert knowing that nobody would occupy there.

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Great article, I also think this buying up everything in site has something to do with the Chinese keeping their currency low, by flooding the markets with it.

Sort of how the Bank of Canada increases and decreases our interest rates to make it more attractive to the companies in the US...

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"China alone saved the world from entering into depression." ..China cant do anything alone...its just a factory for the world.

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First of all, Chinese investors are n't buying that much. I guess its not even 5% of residential properties.

During the US property bubble REITS were proping up the J market. After Lehman, the J Re index dropped a little.

After a potential China bubble pop, I doubt it will have much of an impact on J prices because most of the small Chinese investors are paying cash in Japan not leverage. The highly levereged China domestic market could be hurt though because the banks take a hit.

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"China alone saved the world from entering into depression." ..China cant do anything alone...its just a factory for the world.

without china during the recent economic downturn, the world would've been a lot worse off.

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And without the US during the 90s Asian financial crisis, it would've been a lot worse. So it's even-stevens.

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