China’s Shadow Banking System Could Bring Down The World’s Hottest Property Markets

Chinese investors are major players in the international real estate markets. The country’s outbound property investment totaled US$2.1 billion in Q1 2014, according to Jones Lang LaSalle. 

Shanghai Skyline 

Shanghai Skyline 

From The Financial Post

Now there are concerns about the quality of the loans that have fed into international property markets.

“Will China’s capital flight fuel property bubbles overseas or cause a collapse when China’s liquidity dries up?” wrote Andrew Collier, managing director, Orient Capital Research.

In an email titled “Will China’s Shadow Banking Kill the International Property Market?” Collier writes that the US$2.1 billion figure most likely understates true outbound Chinese property investment because it is hard to track shadow lending.

“Shadow lending is about 40% of total loans so the figure for property investment could easily be double US$2.1 billion — or more,” writes Collier. “More important, the funds are targeted in just a few places; just three cities, Chicago (who knew?), London and Sydney account for 50% of investment. No doubt, Los Angeles and New York will catch up soon.”

China saw US$464 million in outbound real estate investment Q1 in 2014 into Chicago. US$38 million into London, US$242 million into Sydney, US$150 million in Melbourne and US$144 million into Los Angeles. From Collier:

“Let’s say overseas property investment reaches US$10 billion in a year or so due to capital flight. How much of that will be backed by bad loans? What will the default rate be? This is an important question of you are a hedge fund buying up hundreds of properties in key areas. If the wind is sucked out of the market by defaulting Chinese buyers, it will impact property values significantly.

Official Non-performing Loan (NPL) ratios for Chinese banks are less than 1% (0.93% for Bank of China in 1H 2013). But much of the cash invested in foreign real estate will come from the shadow market. We don’t have good data for NPLs in shadow loans, partly because there are many different lender including Trusts, banks through wealth management products, pawnshops etc. But a ballpark figure of 10% would be realistic. If we assume 10% of US$10 billion, that’s US$1 billion in defaulting property loans. Half of those, or US$500 million alone, will be in a few cities such as Sydney, London and Chicago.”