Chinese Real Estate Sector Analysis Part 1: Exploring the debacle and undervalued stocks in an absolutely despised sector
Sometimes the best opportunities are found where no one else is willing to look
Would you rather fish in a pond with so many fisherman crowding up on the shore that there’s barely any fish left to catch and the ones that are left are now so prized for that there’s basically no chance of you a new fisherman with average skills catching one or would you rather fish in a remote pond in the middle of nowhere that people either don’t know about or don’t want to go to because they fear uncertainty?.
Most people would choose the first option, I mean how else do you explain the irrationality in public equity markets right now. The U.S. equity market alone accounts for 70% of the entire global stock market capitalization and well you have stocks there like Nvidia trading at a multi trillion dollar market at absurd multiples; Apple, everyone’s favorite financial engineering hedge fund, a company with no growth trading at 40x earnings; Tesla with declining revenues and profits, a track record of being “specialists in failure” over promising and under delivering, and a CEO who’s clearly more interested in being a politician in DC and running a media company than running Tesla still trades at 200 times earnings and lastly the best for last CIA proxy Palantir with an ugly doomsday fantasizer CEO trades at some crazy triple digit sales multiple. All the while, you have energy in the same equity market trading at bargain basement prices with no one willing to pay attention because of the ape mentality of “muh just DCA SPY,QQQ, and Mag 7 bro, it’s the best bro” and as Peter Collins pointed out recently - 65% of the public market is now in the worst form of dumb money i.e. passive investing”.
All this passive investing mindset does is boost up the prices of consensus index names which have good PR, large market caps, and business models that suit particular agendas and leave behind genuine gold mines for us value investors which operate in sectors of the economy that are essential for it to function and grow. I read an extract from a Berkshire annual meeting recently where he said that he would earn 50% returns a year if he was managing $1 million dollars by looking and buying stocks where no one was willing to even glance. This is what I seek to do as well.
The Chinese real estate sector is one such absolutely despised sector and for good reason. This sector has been reeling off the back of a bubble bursting which shut down an era of mindless speculation, gambling, and excess once and for all. There’s been a four year bear market in this sector which has led to large behemoths going bankrupt and more importantly several speculators and even regular households suffering huge losses on their investment. The bursting of this bubble was necessary for the Chinese economy as a whole to progress and in my opinion has been a net positive for Chinese society and the economy as a whole despite the amount of pain that it caused. What this means for us investors is that despite the indices rallying recently, this sector remains criminally undervalued because most investors completely despite it now regardless of improving fundamentals and structural reforms.
To understand the sector and the stocks that I’ll cover on a deeper level, let’s take a history lesson first in the next section.
History of The Chinese Real Estate Sector
The Chinese real estate sector is truly unique and has its intricacies which are unparalleled in the rest of the world. Let’s take a journey back to the establishment of the People’s Republic of China and see how the sector has changed until the present day and everything that led to this happening.
Pre-Reform Era (Before 1978) – The Communist Housing Model
Under Mao Zedong's centrally planned economy, land and housing were fully state-controlled. There was no private ownership, and the government provided housing as a welfare benefit. Work housing units known as Danwei were allocated to employees based on seniority and need; low investment and high population growth meant that living conditions weren’t amicable and there was a housing shortage in urban areas while in rural areas, people lived communally where housing was provided collectively. This system kept housing costs low but resulted in poor-quality, overcrowded living conditions and a lack of incentive for maintenance or improvement.
Early Reform & Market Liberalization (1978–1990s)
Deng Xiaoping’s economic reforms marked the beginning of a transition toward a commercialized real estate market. In 1978, economic reforms began, the government encouraged private ownership and began reforming land-use rights. In 1982, The Land Ownership Reform was carried out wherein the State retained ownership of land, but local governments could grant land-use rights for fixed periods, allowing individuals and businesses to lease land for real estate development. In 1988, The Landmark Land Law Reform was implemented by amending the Chinese Constitution to legalize the transfer of land-use rights. This enabled real estate transactions and foreign investment in property development.
In 1991, Shenzhen, China’s first Special Economic Zone (SEZ), became a testing ground for private real estate investment, attracting domestic and international capital and in 1998 - The government officially abolished the socialist housing allocation system, forcing citizens to buy or rent homes on the open market. This was a turning point in creating China’s modern real estate market.
The impact of these reforms was three fold:-
Housing demand soared as people sought homeownership.
Real estate investment increased sharply, especially in major cities.
The government encouraged mortgage lending, which set the stage for future growth and risks.
Housing Boom and Urban Expansion (2000s–2010s)
China joined the WTO in 2001 the economy which had already been growing rapidly picked up even more pace and real estate became a major driver of GDP. There was massive urbanization during this period were massive Urbanization which led to over 300 million people moving to cities from the countryside between 2000 and 2020.
Culturally, Chinese like most Asian people groups are attracted to hard assets like gold and real estate as investments since these assets are what have traditionally constituted wealth in this region of the world as opposed to the West which financialized really early comparatively. Even getting married in most Asian countries especially China requires the prospective groom to be a homeowner to get the blessings of his fiancé’s parents. The stock market was always treated as a gambler’s den so as regular Chinese people started becoming richer and richer and prosperity in society increased most of this wealth flowed to real estate. which prompted aggressive real estate development from private developers like China Evergrande, Country Garden, and Vanke which expanded rapidly. This ushered in a period of pure speculation, excess, and greed both from the owners of these private property developers (which I’ll cover later) as well as normal speculators while housing prices in major cities like Beijing, Shanghai, and Shenzhen, property prices increased exponentially.
The government started to become aware and wary of this from its early beginnings and thus in 2003, the first real estate bubble warning was issued and the government introduced cooling measures including higher mortgage down payments. As the 2008 Housing Crisis hit the United States and Europe, China through its large treasury purchases bailed the U.S. and the West out of the deep hole that they had dug themselves in. To further stimulate the economy and protect China’s own speculative real estate market from suffering a similar fate, Wen Jiabo launched a mega 4 trillion RMB stimulus. This delayed the inevitable for a long time and in fact even more of the stimulus money liquidity flowed into real estate.
The greed and excess became so egregious that a few ghost cities started emerging- Overdevelopment, fueled by massive amounts of capital from both speculators and regular households combined, led to under-occupied towns, like Ordos in Inner Mongolia, where massive apartment complexes remained empty. Since then these cities have now mostly become proper fully populated cities but it just goes to show how much speculation existed in the system. Unfortunately, there is a large consensus among new age investors and analysts mostly proponents of Modern Monetary Theory (MMT) that money grows on trees and that leverage doesn’t have to ever be paid back. Well my friends - reality is quite often very disappointing. These real estate developers loaded up on leverage because like most people in the real estate industry - they drank their own kool aid believing that prices would never fall and thus their debt would never be a real issue. The time of reckoning would arrive soon. From 2016–2018 housing prices peaked with speculation at its zenith, housing affordability became a major issue.
Real Estate prices - a large disconnect between government and citizens
There are many disconnects between government and citizens in various countries throughout the world but none more prominent and nuanced than the disconnect about real estate prices. The disconnect in this aspect of policy and economics is so large that disconnects even exist amongst citizens. The working and lower middle class always desire for lower housing prices since for them housing is not an investment but an absolute necessity; these people simply don’t possess the disposable income required to treat housing and real estate as an investment. Meanwhile, the upper middle class and the rich desire for higher and higher housing prices for two key reasons- firstly their net worth is largely tied to the value of their house, particularly for the upper middle class, and secondly the rich and the top layer of the middle class use real estate and particularly housing for speculation and as investment. Juxtaposed to this divide, the government also wants higher housing prices because boosting real estate prices and development is perhaps the easiest way to inflate economic growth (GDP) numbers on paper without putting in the time, money, and policy effort to actually develop a real economy.
Add in the fact that real estate is perhaps the best way to launder and wish ill gotten gains from corruption into a hard physical asset and you have a perfect storm on your hands that the people in power want to have continue forever because they stand to benefit from this charade at the expense of the working class. The age old class struggle plays out again. There’s a very cynical saying that perhaps best describes this- “the strong do what they can and the weak suffer what they must.”
Post 2016, there has been a real conscious effort from the Chinese government and policy makers to bring down housing prices; at first, they attempted to bring down prices gradually but the euphoria and greed in the system had built up for far too long for it to just end up going down gradually— nuh uh—some pain had to be unleashed for the sector to write its wrongs. I’ll explore the downfall of the sector in the next section. The position of the Chinese government is unique as no other government has actively sought to bring down housing prices to make it affordable for regular citizens-they have to be commended for this. We’ll also explore what makes them perhaps the best abled in the world to be able to accomplish this as well as their own constraints in later sections in order to further progress towards finding great investments in this sector.
Excess, greed, leverage, and ego — how things got out of hand and the sector imploded
There’s some things that bubbles are certain to foster and even encourage— excess, greed, leverage, and ego. Perhaps the Chinese real estate bubble is perhaps the best and most egregious example of this. The Chinese real estate has both private and public developers; the public developers were always very conservative when carrying out their development operations since they are fully backed by the Chinese State and because of which their management always remained fully liable and answerable to the State who foresaw the bubble forming from its very nascent stages. The private developers on the other hand proceeded with complete brashness and ego since they weren’t answerable for their business policies to anyone except shareholders (never a rational body of people anyways), who throughout the world have always demonstrated a complete lack of foresight and vision especially if they’re earning outsized returns during times of euphoria— this is precisely why and how most bubbles go completely unnoticed by both the investing as well as regular public until—they inevitably burst.
The real estate industry is heavily reliant on leverage—yes— we’re fully aware of that but if any industry and/or company is trying to sell you the fact that 200-300% leverage is normal then know that you’re being scammed and shilled. Let’s explore how drunk private Chinese developers got on leverage and why they deserved to go insolvent. We’ll start by of course exploring Evergrande— the grand daddy of leverage inebriation.
Evergrande was founded by Hui Ka Yan (Xu Jiayin), can someone please explain why he has two names. He was born into a poor rural family in 1958 and was raised by his grandmother in a village in central Henan province after his mother died of sepsis when he was just eight months old. He graduated from university in 1982 and spent the next decade working as a steel technician before becoming a salesman for a property developer in the city of Guangzhou in southern China. It was there that he founded Evergrande in 1996. The company expanded rapidly as China's economy boomed by borrowing large amounts of money, what I like to call the “leverage to the tits up approach”.
Evergrande raised $9 billion in its 2009 Hong Kong stock market listing and used the proceeds along with egregious amounts of leverage to expand. Evergrande's business model was to “leverage to the tits up” and then sell apartments that had not even been built leading to the pioneering of ghost cities. Hui was also scummy enough to sell investment schemes to employees and workers wherein he promised them outsized returns if they were to pledge a part of their salary to Evergrande’s property investment fund—these funds raised from employees’ salaries were then further used for property development—can there be anything more scummy and greedy. Hui’s net worth skyrocketed off the back of this behavior and he used this new found wealth to ostentatiously show off and lead a very lavish lifestyle. A photo of him wearing an Hermés from a Party Conference became very viral on Chinese social media earning him the nickname “belt bro”. He also bought expensive $70 million houses in Hong Kong, luxury yachts, London’s most expensive house, GulfStream private jets etc. Hui reportedly had a regular poker game with fellow property tycoons Henry Cheng Karshun of New World Development (another very indebted developer but from Hong Kong which will probably go bankrupt) and Joseph Lau Luenhung, the fugitive former chairman of Chinese Estates Holdings— birds of the same feather indeed flock together.
Hui wasn’t done just in real estate however he thought of himself as some sort of demigod and thus started a series of other ventures again juiced up with obscene amounts of leverage. In 2018, Evergrande acquired a 45% stake in electric vehicle company Faraday Future (hahahaha birds of the same feather indeed flock together) for $2 billion through its Evergrande Health subsidiary (firstly, why does a real estate company have a health subsidiary and secondly how is health related to EVs). Later in November 2019, Evergrande announced that it would invest 45 billion RMB over the following three years to develop NEVs, build three production bases in Guangzhou and Shanghai, and launch electric vehicles branded as "Evergrande New Energy Vehicle" in 2020, creating the Hengchi electric vehicle brand. Hui didn’t stop at NEVs, his Evergrande Health subsidiary operated the "Evergrande Health Valley" in Nanning— a health and wellness park, and retirement community It also worked with Brigham and Women's Hospital in Massachusetts to manage Boao Evergrande International Hospital in Hainan. Furthermore, Evergrande also branched out into starting its own movie studio, theme park, agribusiness (this included bottled water, cooking oil, grain, and pig farming), and a football (soccer) team called Guangzhou Evergrande FC. What business a real estate developer had started all of these ventures— I’ll guess we’ll never know— needless to say all of these failed. In September 2023, Bloomberg reported that Hui was placed under police control and Caixin reported that Xia Haijun, an ex-chief executive officer of Evergrande, and Pan Darong, a former chief financial officer, were detained by Chinese authorities. Evergrande stated on 19 March 2024 that the China Securities Regulatory Commission (CSRC) had found that the company had overstated its revenue in 2019 by 214 billion yuan (nearly $30 billion), or about half, and in 2020 its revenue was overstated by nearly 80%, or 350 billion yuan ($48.6 billion). The CSRC also suspected problems with the bonds Evergrande issued. The regulator fined Evergrande 4.2 billion yuan ($579.5 million) for falsifying its revenue, among other financial misconduct. Hui was a complete fraud and hasn’t been heard from in the public ever since; I don’t know whether he’s alive, dead, in a prison, or wherever but he completely deserves what’s happened to him. Evergrande scaled the absolute peak of leverage fueled degeneracy but the other large private developers weren’t much different. Country Garden, Vanke and other such developers also burnt money starting stupid businesses and making dumb investments which they had no expertise in and also leveraged up a lot. All of these are now either bankrupt or close to it but what caused this? let’s explore this in the next section.
What changed and the end of leverage mania
In 2020, President Xi and the Chinese leadership had finally seen enough. The government was now willing to completely cut down on the toxic and rampant speculation in the property market. President Xi released a new guideline for real estate developers called the “Three Red Lines” which imposed new leverage limits on real estate developers. Any company that didn’t comply wouldn’t be able to raise further debt. These limits namely are:-
Liability to asset ratio <= 70%
Net gearing ratio <=100%
Cash to short-term debt ratio >=1.0
Panic spread throughout the entire real estate industry as players like Evergrande realized that they weren’t operating in compliance with these guidelines and would heavily struggle to meet them. President Xi’s move was excellent in my opinion as it ended the blind speculation prevalent in the Chinese real estate market which needed to protect the structural strength of the Chinese economy and to protect it from experiencing a Lehman moment or a crisis akin to the Japanese real estate crisis after the Plaza Accord which killed the Japanese economy’s growth prospects for all practical purposes. The COVID pandemic coupled with the new Three Red Lines policy effectively killed the private developers with over leveraged balance sheets as housing demand plummeted rapidly rendering these developers completely unable to sell more houses to pay off their burgeoning debts. I mean it was bound to happen—as Asianometry put it—Evergrande wasn’t flirting with the red lines but took them to prom and got them pregnant in the backseat of a Volkswagen Beetle.
The most prominent developer, Evergrande, went bankrupt followed by a slew of other large small and private developers kicking off a large deleveraging cycle in the industry and the Chinese economy as a whole. A lot of pain was and has been caused in the industry and for the economy as well but it was well needed and the situation now is improving with the real estate sector now being completely reformed. Let’s explore the current and expected future dynamics of this now reformed sector after all the blood on the streets.
The current dynamics of the sector, what sets China apart from basically almost every country in the world, and the future of the sector
President Xi’s quote has to be closely studied and analyzed—”houses are for living not for speculation” and “ common prosperity for all”. This outlines and establishes a clear policy position to bring down housing prices, curb the endless speculation, and make cheap but quality housing available to all. Let’s go a bit down memory lane and look at societies and countries that have managed to provide cheap but high quality public housing to citizens. Two names spring to mind— Singapore and the USSR— two completely different societies on the surface level but with very similar approaches when analyzed deeply.
Firstly, both countries realized that cheap but high quality public housing can only be provided by State intervention and an active role of the State rather than the involvement of private players since private players always seek higher and higher profits and thus their involvement shall always boost speculation. Secondly, there needs to be a robust anti-corruption policy that stringently punishes bad actors in order to prevent corruption from bureaucrats and other government officials involved in the sector because well it’s well established that most bureaucrats throughout the world are complete leeches who won’t hesitate to run governments and government owned companies into the ground for the sake of personal profits. The reason why China can emulate this is because China’s anti corruption measures have now become one of the most stringent and strict measures in the world. I mean just look at how Party members and bureaucrats were sentenced to prison or even death for corruption under President Xi’s tenure who’s outlined various times in his speeches that corruption is the greatest threat to both the Communist Party of China and the Chinese State itself.
Now, one of the key reasons for Singapore's success is often not factored into people’s analysis— Singapore’s size— if the Chinese government only had to fix burgeoning housing prices in Shanghai for example then they would do it way more easily as compared to fixing burgeoning housing prices throughout the entire country. The Soviet Union was also immensely successful in providing high quality public housing but since they didn’t have a free market in the housing sector like China their example doesn’t fully apply but yes inspiration and parallels will be drawn from their approach.
As I’ve already outlined, most private players in the sector have already gone bankrupt or are on the brink of it because of their own practices and also that private players cannot be relied upon in this sector if you want to curb speculation since these players will always want higher profits. Thus the State will have to step in. But now, I hear you asking “but Dragon, what if these companies become non profits or state owned welfare driven companies that make perennial loses for the sake of social welfare, how then do we make money”— the answer to that question is that making them operate like this isn’t feasible. Local governments derive a large portion of their revenue from the sale of land use rights thus a rapid fall in real estate prices or the nationalization of the sector as a whole would be detrimental for them. So this creates two scenarios for us:-
Scenario 1: Real estate prices have already fallen 30-40%. SOEs take over the sector, they buy land from the State, develop it and sell it all at current housing prices. They will sell at current prices because no government wants to lose out on additional revenue, these state owned developers pay large dividends to the government so obviously they won’t want to lose it. The same goes for land acquisition prices.
Scenario 2: The sector gets divided into two parts: government departments and/or unlisted SOEs buy land from local governments at current prices and rent/sell them to the public at below market rates making housing affordable to the working class while the listed developers like China Overseas, Joy City etc orient themselves to target the middle class and the rich with very high quality developments that they can sell for market rates or higher than market rates.
Scenario 1 is way more likely than scenario 2; scenario 2 is just me fantasizing but in either case we as investors in SOEs will still make money.
Now if you argue with crap narratives like “China’s communist they’ll nationalize everything” then I don’t know what to say to you. If they wanted to do it, they would’ve done it a long time ago and secondly doing so would hurt them as well. The government realizes this and they’re way smarter than you and me so please don’t project your predispositions and inhibitions onto them—separate reality from emotion.
The real estate market has been improving and is evident from the numbers released by all developers but in particular from those released by the developers that I’ll be covering— China Overseas Land and Joy City. China Overseas Land’s contracted property sales went up by 14% in January 2025 while Joy City’s H1 24 contracted property sales went up by 40%. I’ll explore both of these developers along with two property managers in the next section.
China Overseas Land (0688.HK)
China Overseas Land & Investment Ltd. (COLI), incorporated in 1992 with a head office in Hong Kong, is a subsidiary of Fortune Global 500 firm China State Construction Engineering Corporation (CSCEC). COLI focuses on residential, commercial, and mixed-use property development throughout China with an emphasis on Tier 1 and Tier 2 cities such as Beijing, Shanghai, and Shenzhen. At of 2023, COLI has a reserve land of more than 60 million sqm in high-demand cities. It is renowned for its fiscal caution, with a rating of "A" credit by leading credit agencies, unheard of in leveraged Chinese property companies.
COLI’s net gearing ratio stood at 38.7%—well below the regulatory "Three Red Lines" thresholds (70% ceiling), ensuring compliance and financial flexibility. They have 100 billion RMB in cash and access to state-backed financing, COLI can capitalize on distressed asset opportunities and sustain operations during downturns. 85% of their land reserves are in Tier 1/2 cities, where demand remains resilient.
Recent measures (e.g., mortgage rate cuts, relaxed home purchase rules) aim to stabilize the sector. COLI is a prime beneficiary due to its focus on mid-to-high-end housing. China’s urbanization rate (65% in 2022) is expected to reach 75% by 2035, driving sustained demand for quality housing particularly in Tier 1 and Tier 2 cities. The "Three Red Lines" policy (2020) has weeded out over leveraged players, consolidating market share among state-backed giants like COLI.
The way I see the Chinese real sector proceeding is evolving into a high yield bond proxy with state owned players dominating the game. Now ask yourself what would you pay for an A grade rated bond by S&P Global issued by a company fully backed and owned by the Chinese State which is one of the most solvent States in the world and will definitely not let companies owned directly by it go bankrupt. I would be happy to pay 1x book for it but right now COLI trades only at 0.37x times book with a 5.57% dividend yield at the closing price on Friday 14th February 2025. So COLI is a hybrid of a growth and bond proxy play. As fundamentals of the real estate sector keep improving, the market should price this at a minimum of 1x book in the future while after that it becomes a bond proxy. So right now even after a small run, the stock has asymmetric risk with limited downside, a good dividend yield, and large potential upside.
Joy City Property (0207.HK)
Joy City Properties Limited, a subsidiary of China Oil and Foodstuffs Corporation (COFCO), is a leading developer and operator of mixed-use commercial complexes as well as residential real estate in China. Founded in 2004 and listed on the Hong Kong Stock Exchange, Joy City focuses on large-scale urban projects integrating shopping malls, offices, hotels, and entertainment venues. Its flagship “Joy City” and “Joy Breeze” brands dominate Tier 1 and Tier 2 cities, including Beijing, Shanghai, Chengdu, and Hangzhou. As of H1 24, Joy City operates commercial complexes with over 3.5 million sqm of gross floor area (GFA), attracting 400 million annual foot traffic. Backed by its state-owned parent (COFCO, Joy City combines operational expertise with access to low-cost capital, positioning it to thrive in China’s urban revitalization wave. 80% of Joy City’s assets are in Tier 1/2 cities, where urban consumption growth outpaces national averages.Joy City malls achieve 20%+ ROI post-stabilization, driven by innovative tenant mix and experiential offerings (e.g., rooftop gardens, VR arcades). Most of Joy City’s investment properties have occupancy rates over 90%,except for the latest constructed properties, and a significant number of them have occupancy rates over 95% as well underscoring the quality of their assets.
23% of their revenues is recurring rental income from their investment portfolio while the rest comes from property development giving them a significant safety net as compared to other pure play developers. They have large banks in emerging tier 1 cities like Hangzhou and Xi’an of about 400,000 GFA.
Their contracted property sales went up by 40% in H124, quite unparalleled in this real estate market while their net gearing ratio is high at 46.6%, below the Three Red Lines established, but since they are an SOE backed by an even larger SOE i.e. COFCO the chances of them going bankrupt are basically negligible as they can always raise cheap funding from the state.
Joy City currently trades at about a 92% percent discount to book value, basically priced for bankruptcy, even though there’s a negligible chance of it going bankrupt. I won’t assume the 1x book fair value that I did for COLI here because its much smaller but even if it trades at 0.50x book in the future there’s still a large amount of upside to be had here along with a decent 3.36% dividend yield as you wait.
Conclusion
Thank you so much for reading. Piecing this together took me a lot of time and effort so I’d appreciate any feedback that you have. The second part covering 3-4 more companies will be coming shortly in the next few days, I shall try to reward your patience to the best of my abilities.
I wonder how the investment merits of these chinese SOEs would stack up against the smallish net-net HK developers such as Tai Cheung (8.3% yield, net cash) and Miramar (6% yield, net cash), also similarly trading at deep discounts to their book. Perhaps they are an apple-orange comparisons, but with limited resource, i do wonder which offer more bang for the buck. Any strong view here?
Thanks for the write-up. A great read.
Provides much needed historical context. Great read as usual. Excited for Part 2, thanks!