I'm kinda working off this post from LinkedIn that I wrote. Sometimes the best way to think is to write. Wait. Not even sometimes. All the time. When you learn to edit yourself, that's when you start to think. So here's my effort at thinking.
I want to conduct a crazy little thought experiment. I want you to imagine "real estate values in China" and think to yourself exactly, "What does a 'nice house' look like?
"What does a 'nice apartment' look like?"
Think to yourself:
WHAT DOES $30 MILLION LOOK LIKE?
Does it look like this?
Picture: homesoftherich.net (This house is Fort Wayne, IN and is part of a sprawling estate worth $30 million.)
Or maybe like this?
Picture: luxify.com (This house is in Beverly Hills, IN and is also worth $30 million!)
Now let me show you what $30 million of real estate value looks like in my neighborhood in Shanghai, China. Pictured here below is a modest little apartment building located reasonably near downtown Shanghai, China.
It has 30 units, each about 75 square meters each. If you assume a value per square meter at about 80,000 CNY per m2 (and honestly that's probably a little low at this point!), that’s a 600,000 CNY valuation per unit, or approx. $1 MILLION USD PER UNIT.
Let's check out what it look likes here:
Yes, this measly squat little residential building you see pictured here represents $30 MILLION OF ASSET VALUE in the Chinese real estate markets of 2018.
I don't know why maybe other people, especially if they are Chinese, don't think that's crazy. But to me the contrast is quite stark. Let me explain...
Best case scenario... if these units were all rentals... they would yield... in their current slipshod shape... about $250,000 per year in rental income, representing approximately a 0.83% yield.
Clearly, the rationale for people buying Shanghai apartments today is not because they are income-producing investments. That leaves only the rationale that they are buying now in hopes of finding a “Greater Fool” later who is willing to buy at an even lower price-to-yield.
But, I mean... 0.83% is already pretty low... especially to ask for an investment as large as $30 million.
In the few decades of China’s private real estate industry, so far that "Greater Fool" logic has worked. But it’s not guaranteed to do that forever.
When you play Musical Chairs, eventually the music stops.
No wonder Jack Ma & Li Ka-shing, among others, have recently called a top to the value of China’s #buildings!
Does this building look like $30 MILLION to YOU?