Academic journal article Journal of Real Estate Portfolio Management

Dynamics of the Direct and Indirect Real Estate Markets in China

Academic journal article Journal of Real Estate Portfolio Management

Dynamics of the Direct and Indirect Real Estate Markets in China

Article excerpt

Executive Summary. This study examines the risk-adjusted performance of the direct real estate markets in China (Beijing, Shanghai, Guangzhou, Shenzhen) and the indirect real estate markets in China (real estate companies on the Shanghai and Shenzhen stock markets) over 1995-2002, as well as assessing the dynamics between these two important real estate markets in China.

Over this eight-year period, the office markets and real estate companies are seen to significantly under-perform the other asset classes on a risk-adjusted basis; however, evidence of portfolio diversification benefits is also seen for both the office markets and the real estate companies in China, with these diversification benefits being enhanced in more recent years.


With the introduction of an open-door policy in 1978, recent years have seen China emerge as a major economic force in Asia and internationally. Having the world's largest population of over 1.25 billion and major international-standard cities such as Beijing and Shanghai have been key factors in this recent economic development. Exhibit 1 gives a general demographic and social profile of China at December 2002.

Fundamental to this success has been strong economic growth, significantly ahead of the other Asian countries (see Exhibit 2). Over $500 billion in foreign direct investment has facilitated this economic growth, with China accounting for 16% of the world's economic growth in 2002 and 6% of global exports (see Exhibit 3 for economic and financial profile of China at December 2002). This strong economy, expanding exports and stable political leadership have been further enhanced by China's WTO membership in December 2001. This is expected to see significant legal and regulatory changes for foreign investors in China, particularly concerning funds management, with more flexible guidelines for Chinese-foreign funds management established in June 2002 (Nichter and Shoesmith, 2002).

Stock markets were established in China in 1990 in Shanghai and Shenzhen, with a total market capitalization at December 2002 of over $450 billion. This sees the Chinese stock market as the second largest in Asia, only exceeded by Japan. Real estate companies listed on the Chinese stock markets make a significant contribution to China's development, with some likelihood of REIT-type products being introduced in China in the next few years. Similarly, with Beijing as China's capital and Shanghai as a major Asian financial center, office rents in these cities are amongst the highest in Asia (see Exhibit 4). While concerns have been raised over the level of information transparency in the real estate markets in China (Jones Lang LaSalle, 2002), there has been recent improvement in this regard flowing from China's WTO membership.

Research on the Chinese stock markets has largely focused on stock market segmentation (Wo, 1997; Chiu and Kwok, 1998; Poon, Firth and Fung, 1998; Fung, Lee and Leung, 2000; and Chen, Lee and Rui, 2001), stock market volatility (Bailey, 1994; and Lee, Chen and Rui, 2001) and stock market anomalies (Wong, Chen and Shang, 1999). Real estate research has largely been directed to changing land tenure systems in China (Walker and Li, 1994; Li and Walker, 1996; Li, 1997; and Li, McKinnell and Walker, 2000), Chinese appraisal procedures (Li, 1995; and Wong, 1998), real estate development (Li, 1996; and Han, 1998), investment opportunities (Miles and Mei, 1994; and McCoy, 1995), housing markets (Zhang, 2001) and office markets in China (Tse, Chiang and Raftery, 1999; and Webb and Tse, 2000).

The relationship between the indirect and direct real estate markets has attracted considerable research interest in recent years, particularly in the United States (eg., Giliberto, 1990; Gyourko and Keim, 1992; Myer and Webb, 1993; and Barkham and Geltner, 1995) and the United Kingdom (eg., Barkham and Geltner, 1995), with lags of up to one year evident in the U. …

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