Leading fund managers at M&G and Schroders say they are both positive on parts of the Chinese property market despite concerns of a bubble in the asset class.
Michael Riddell, bond manager at M&G, says that there is not a property bubble across the whole of China, while Jim Rehlaender, property manager at Schroders, has been adding to Asian property in his portfolio.
Riddell says it is universally acknowledged that the main problem with China is real estate, as it represents about 25% of its GDP.
He says: “Property prices and credit growth have been soaring in China. In Beijing, there is house price to income ratio of 23 times and in Shangai 16 times. In the US and UK, if it becomes more than five times then it is seen as alarming.”
Riddell concludes that “there is no doubt that there is a property bubble in mainland China, particularly in some of the big tier one cities.”
However, he does not believe the same applies across China, as the government have been trying to cool the market by increasing interest rates, deposit rates and increasing the required reserve ratio with the banks, which has slowed down lending.
He says: “There is no evidence of a property bubble in some of the tier two and tier three cities in China.”
Rehlaender has been adding Asian property companies in his portfolio on attractive stock market valuations, after they have plummeted on macro concerns over Europe and the US.
Rehlaender, manager of the £581m Global Property Securities fund, currently has his largest position in the fund in Asia ex Japan at 38.5%, an overweight of 4.1% to the benchmark, the FTSE EPRA NAREIT Developed Real Estate Index.
Speaking at the Schroders investment conference in New York last month, Rehlaender said: “We have been adding to Asia in the portfolio. The valuations in Asia are back to where they were following the Lehman debacle. Funds are trading at 50% discounts to net asset value. Asia has been really has been crushed, but has the best balance sheets in the business and best economic growth.”
He says: “There is a lot a demand and liquidity in the property market in China and this does not get reported in the press.”
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