Chinese Real Estate: Buy Or Sell?

By Matthew McCall | September 29, 2010 AAA

The red hot Chinese real estate market continues to soar even though the country's government is hoping to slow things down to avoid a bubble reminiscent of the US housing bubble. In August, property prices came in 9.3% higher than the year earlier. Citigroup put out a report that estimated a 28% increase in transactions during the month.

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Since 2002 land prices have rose tenfold over all and in certain cities the prices have increased about 30 times over. Still money continues to flow into real estate all around the country from the major cities to speculative land that may one day pay huge dividends. All the numbers point to an eventual bubble and recently one more indicator showed up when Chinese online real estate website SouFun Holdings began trading in mid-September to a warm welcome. It could be the signal of the end for the China real estate market.

When companies go public and soar on their first day in a sector that is already mature, it can be a signal that the trend is either slowing or about to burst. So when SFUN gained 73% on its first trading day, the red flag immediately went up for me. The stock and sector could continue its run in the near-term, but the probability of a pullback in the near future is high and investors should be aware of the potential drop.

Real Estate Competition
Already trading as an ADR in the US is the leading provider of real estate information online, China Real Estate Information (Nasdaq:CRIC). During the company's most recent quarter, earnings only rose 1.6% from the year earlier. However, revenues soared 96% with organic revenues up 21%. The stock has soared recently with the global markets, but remains well off its late 2009 high. A forward P/E ratio of 18.8 is fairly attractive, but this is based on the housing market boom continuing.

E-House China Holdings (NYSE:EJ) is more of a traditional real estate play because they offer the personal real estate services most are familiar with. They are also a property management firm that will be involved with developing communities.The stock has had a big run lately, gaining over 50% in the last three months. Even after the rally, the stock trades with a reasonable forward P/E ratio of 15.9.

Buying into the Sector
Investors that prefer to own the sector in lieu of an individual stock are in luck. The Guggenheim China Real Estate ETF (NYSE:TAO) invests in stocks and REITs that generate the majority of their revenue from ownership of land or property development in China. The ETF charges and expense ratio of 0.65% and is composed of 41 stocks that mainly trade in China, but are open to public investment. The ETF has had a nice year with a gain of nearly 10%, beating most averages. (For more, see Investing In China)

Bottom Line
Most trends eventually come to an end or hit a dull spot where they go sideways for months if not years. Right now the China real estate market continues to boom - however, it is just a matter of time before it slows down or halts. As we all know, when a bubble bursts, it hurts. (For related reading, see Why Country Funds Are So Risky.)

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