Why Shanghai Real Estate Is The Most Obvious Bubble Ever

Vince Veneziani, Joe Weisenthal
chinese couple

The whole world felt the reverberations of China imposing leverage limits on its banks. Regulators there are clearly freaked out by the heat of its economy.

Meanwhile, Jim Chanos and Thomas Friedman are going back and forth about whether China is a bubble, and whether there’s money to be made shorting it.

So we thought we’d adjudicate the question.

Our answer is yes, China’s real estate is the most obvious bubble ever. More obvious than the Dubai bubble in fact.

Check out the evidence here — >

Lending has been growing like crazy, fueling the bubble.

It's not just about residential property. Commercial real estate is on fire too.

Despite fears of an imminent bubble, investors are still buying up commercial real estate properties. All the big banks are getting involved, as if the U.S. housing bubble had never occurred:

It's a reasonable point to ponder in a city where the price of residential property has risen nearly 20% over the past 12 months. But judging from the flurry of deals being done by some of the world's most sophisticated global investors, clearly not everyone thinks the boom has peaked.

Morgan Stanley Real Estate Funds teamed with local developer Shanghai Yongye Enterprise Group and two Singaporean partners in June, 2003, to pony up $90 million for a high-end apartment complex in downtown Shanghai called Jinlin Tiandi. In January, Macquarie Global Property Advisors of Australia paid $98 million to buy 95% of Xin Mao Tower, a 20-floor luxury office building. And in April, developer CapitaLand Ltd. of Singapore announced that Goldman, Sachs & Co.'s (GS ) real estate division, Whitehall Funds, had paid it $107.6 million for Pidemco Tower, a 24-story commercial building in Shanghai's central business district.

'The fundamentals in commercial property in Shanghai are very positive,' says James Quille, CEO of Macquarie Global Property Advisers in Hong Kong. 'And there is a well-trodden path in terms of how capital is structured and repatriated.'

Image: AP

And people are burning themselves in protest of rapid development.

The drive to build property is so enormous and aggressive that some people have lit themselves on fire to protest forced land appropriation.

But it doesn't seem to be slowing anything down.

The indifference to this is classic moral amnesia.

Nevertheless, some are starting to smell a rat.

China could be the next Dubai, says Jim Chanos. Note that he has a pretty good track record of spotting bubbles.

China doubters are getting called idiots

(See Thomas Friedman in today's New York Times)

Goldman Sachs is starting to sell too.

The bank just dumped some Shanghai property (Remember, these were the guys who even saw the US housing bubble popping!).

And of course, what would a bubble city look like without lots of interesting-looking buildings. Like this one.

Source: Wikipedia

And this one

Source: Wikipedia

And this one.

Source: Wikipedia

And of course a space-age one.

Source: Wikipedia

And this cauldron-shaped stadium.

Source: Wikipedia

We're even getting gaudy visions of what Chinese cities could look like.

Here's a rendering of what Shanghai will look like if it adds more giant, architecturally awkward towers. Dubai anybody?

Of course, there's the requisite shoddy construction.

Here's a hallmark of bubble real estate. The construction of buildings is total garbage.

So it's obvious that there's a bubble. But the problem is...

Any bubble can go on A LOT longer than you might think.

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