China Real Estate ETF (TAO) In Focus: Will The “Bubble” Burst?

by on May 11, 2010 | ETFs Mentioned:

A number of statistical bulletins released in recent weeks have served as an excellent illustration of the ever-widening cap between the world’s emerging and developed economies. While the U.S. and Europe struggle to stay afloat and eke out positive GDP growth, the concern in China is very different. Beijing has been concerned in recent months about an overheating economy, seeking to reel in stimulus policies introduced during the depths of the recent recession. The latest round of data indicates that, for the most part, these policies have been successful in accomplishing their stated objectives. But one troublesome area continues to cause anxiety among investors around the globe; Chinese real estate prices have become a runaway freight train, surging at rates that seem unsustainable.

China’s National Bureau of Statistics said this week that average urban property prices climbed 12.8% in April from a year earlier, accelerating from March’s impressive 11.7% pace. Consumer price inflation also picked up, rising from 2.4% to 2.8% on a year-over-year basis, although this rate remains below the government’s stated 3% target. April property sales were down slightly from March levels, but still came in about 27% higher than the previous year according to the new statistics.

Perhaps the most telling indication of the status of China’s property markets will come next month, since April figures didn’t fully reflect policy changes made during the month. In mid-April, the Chinese government raised the down payment for second home buyers to 50% from 40% and said that first time home buyers must pay no less than 30% of the property price if the area is above 90 square meters. The government also said it would increase land supply available for new residential properties in a bid to slow rises in real estate values and encourage more sustainable pricing trends; the Ministry of Land and Resources will more than double the land supply available for new homes.

China Real Estate ETF In Focus

As the uncertainty surrounding Greece’s public finances has shown, chaos in one corner of the world quickly ripples throughout global equity markets. So investors everywhere are keeping a close eye on the situation currently  playing out in China’s real estate market.

One of the most interesting ETFs offering exposure to the Chinese markets is the Claymore/AlphaShares China Real Estate ETF (TAO). This ETF tracks the AlphaShares China Real Estate Index, a benchmark that includes REITs that derive a majority of their revenues from real estate development and management in China, Hong Kong, and Macau. TAO has taken a wild ride over the last year; it tumbled to start 2010, recovered sharply, and then dipped again in April. But considering all the talk about a real estate bubble in China, the performance chart of an ETF focused exclusively on Chinese REITs may be a bit surprising:

TAO hasn’t surged higher as chatter of a real estate bubble has picked up, a development that may confuse some investors. It’s hard to deny that bubbles may be forming in certain areas of China. “An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere,” writes David Barboza.

But reports of a real estate bubble seem to be wildly exaggerated when looking at TAO’s recent performance; returns have been impressive, but haven’t exactly raised any major red flags. Moreover, a number of prominent Chinese economists have expressed in recent months the belief that bubble fears in China are greatly exaggerated. Dismissing comparisons made to the property bubble in Dubai, these analysts have been quick to point out that unlike Dubai, China has no shortage of industry, manufacturing, or agricultural industries.

Real or imagined, bubble fears have likely helped to keep TAO in check in recent months. If these worries turn out to be overblown, the China Real Estate ETF could have a bright future ahead. If, however, a bubble is indeed forming, TAO could be in for a rocky stretch.

Disclosure: No positions at time of writing.