Property Grunt

Friday, April 21, 2006

The China Syndrome

“China is a sleeping giant. Let her lie and sleep, for when she awakens she will astonish the world.”


As all of you may know the president Hu of China has been taking a grand tour of the United States. Titans of Industry like Bill Gates and dignitaries like our President have lined up to bury their faces in his butt cheeks and to proclaim their economic allegiance to China.

There are those who would tout access to China a windfall for the American economy due to the billions of Chinese people that need to indulge their appetite for consumerism.

According to USA Today

"I expect our exports to China to grow even faster. ... As they become richer, they have an appetite for all kinds of products. As that continues, we will be a major beneficiary," says Donald Straszheim, vice chairman of Roth Capital Partners, an investment bank in Newport Beach, Calif.
China usually attracts attention either as a relentless manufacturer of low-cost products for other countries or as a fertile market that U.S. corporations hope to tap through local operations.
All but unnoticed, however, is the steady expansion of U.S. exports. Companies prospering by exporting to China run the gamut from hardwood lumber suppliers to manufacturers of sophisticated coal-mining equipment. As a building boom remakes Chinese cities and towns, heavy equipment maker Caterpillar is thriving. Iowa soybean farmers and cotton growers in Georgia also number China as their top customer.

However, you might all be surprised that I feel that China’s boom may have a detrimental effect on certain parts of economy including the real estate market.

America has nothing on China when it comes to development. As cities are literally being built overnight with the help of a government that refuses to let anything get in the way of progress. Even if it is at the cost of the rights of their own people.

China’s demand for raw goods is also one of the key reasons why oil prices have begun to skyrocket and other resources are in high demand and with drastic consequences, even in out own backyards
A real estate development company purchased a site in New Jersey began building a massive condo complex. A subcontractor was used to purchase the steel to be used for the development who, decided in his infinite wisdom to wait on the order because it wasn’t due to break ground for almost two years.

When he eventually put in his order he realize how screwed he was because steel prices had hit the roof due to the massive demand from China. In a panic, he contacted the contractor stating that he was in serious trouble and that he needed more money. When the developer was informed of this situation his response was “We signed a contract.”

Eventually all parties decided to rework the deal however the subcontractor barely broke even. This is just one of the many examples of how China’s insatiable appetite will have a profound effect on the real estate market particularly for new developments. Because of skyrocketing costs, local developers are going to do everything they can to lower their overhead even if it means getting “creative” with their buildings.

I know of a super who was a former contractor who would never live in some of the new developments that have sprung up in his neighborhood. After examining these developments from afar he realized that they were being put together with spit and bailing wire.

China has just awoken, so until the rest of the world can catch up with its demands, expect choppy conditions for the real estate market.