Friday, November 14, 2014

Yujiapu Financial District - Estimation Question

I've written about Tianjin and the Yujiapu Financial District, still vacant.


How much iron ore and met coal did it take to build this financial center? How many dry bulk carriers would that have filled? How do those quantities of ore and coal compare to the output of a mine?

Some facts to work with: "the district comprises at least 47 skyscrapers", here's some architect's renderings of the city, "the district has 120 planned plots which will equate to a total construction mass of around 9.5 million sq m" [pdf], and a marketing pitchbook [pdf].

12 comments:

Anonymous said...

I'm not sure what your point is, CP. The buildings need to be finished and inspected before inhabitants can move in. That's why Yujiapu is empty. Just because the district is full of construction workers now does not mean presales haven't occurred yet. And unlike many US states, real estate developers realize revenues before property is delivered. Surely, there is a real estate bubble in China. But this is mainly due to too much supply in the luxury, multi-bedroom segment of the residential market. Most home buyers are shopping for one or two bedroom units, predominantly nearby where they (will) work or retire. The central government has been curbing speculation at the high end of the market. They require relatively large down payments (esp. when purchasing a second home) that are topped off with a one off property tax that goes to the local and provincial governments. Each city and property within are very different markets but overleveraged developers have been constructing less and are not buying land year on year; that is a positive sign.

eah said...

And unlike many US states, real estate developers realize revenues before property is delivered.

Neat trick!

Anonymous said...

overleveraged developers have been constructing less and are not buying land year on year; that is a positive sign.

Not for the local governments that depend on property sales to meet their budgets.

Anonymous said...

That's partially true, James. Property buyers (not developers) pay property taxes to city and provincial governments. Consequently, all sales (not just new property sales) are being taxed. The yearly volume of property sales remains comparable to last year. So government revenue from property tax will be more or less be similar to the figures of last year.

That said, the central government has made financing more expensive and less available to developers, while simultaneously reducing the cost of mortgages for first time home buyers over the past two months. Demand began to pick up early in October compared to a slower and later start in 2013. Most property sales in China occur in Q4 and Q1. So we will need to wait and see how effective the PRC government and state owned banks are at stimulating demand. That said, the fact that residential supply is becoming more of a constant remains a positive sign for China since real estate is about 20 to 30% of GDP.

Local government budget shortfalls are indeed very important since many city and providence governments are liable for obligations that comprise around 50% of their fractional contribution to China's GDP. That said, the central government made amendments to regulations (in September 2014) which now allow 20 major cities to issue bonds to private investors for the first time ever. This is by no means a long-term solution to the issue of ballooning local government liabilities. Yet, it is buying the central government time to structurally reform the shadow banking based financial system and avert a crises in China. Should the central government fail to prevent a crises from occurring, then the extra time would either support a slower deleveraging, or result in defaults (which really can only be resolved through inflation over a longer time horizon). Thus, I would argue that "shadow funds" are more of an issue than so called "ghost cities" and local government deficits in China.

Anonymous said...

Local govs also make money by selling land to developers, either land they own or (more usually) land they expropriate and then sell at a markup.

http://knowledge.ckgsb.edu.cn/2014/09/03/policy-and-law/the-role-of-land-sales-in-local-government-financing-in-china/
"The fees—or in other words, the income from land sales—accounts for as much as 35% of local governments’ fiscal revenue in 2013"

Anonymous said...

Yes, James, we are referring to the same tax (which arrises when property rights are transferred by anyone, not just developers). The state owns all land in China. The tax revenues of provincial and local governments depend heavily upon the appreciation of land values and sales volume.

Opium War said...

Haha:

"The buildings need to be finished and inspected before inhabitants can move in. That's why Yujiapu is empty."

If you look at the video, construction has stopped. That's why people are reporting that construction has stopped, that's why the buildings aren't finished years after they should have been.

Also, nobody rational builds 50 high rise office buildings all at once. You build them as needed, for tenants to move into, or you are wasting time-value of resources.

You also don't build a financial center from scratch.

The mere pattern of development (building this many big buildings simultaneously, in an area where there was no commerce before) proves to someone with economic understanding that the project was a boondoggle destined to fail.

CP said...

Nobody has worked on the estimation question! There are hints in the next thread.

Anonymous said...

Yes, James, we are referring to the same tax (which arrises when property rights are transferred by anyone, not just developers)

No, we aren't referring to the same tax. When a transfers occurs between private parties, the gov't charges the buyer a transfer fee. When a local government transfers land rights to a developer and the developer builds something, the gov't charges the transfer fee but the developer also becomes liable for a land appreciation tax when it completes the project. The gov't can also earn money directly from the sale of land, e.g. if it expropriates farmland at one price and sells it to a residential developer at a higher price.

In a private-private transaction, the tax is purely a deed tax. When the government sells land, it effectively earns capital gains. They may both fall under the rubric of land transfer revenue, but they're different things with different levels of profitability to local governments.

Anonymous said...

@Opium Wars:

Obviously you did not watch the video. Not only are there construction workers, but the filmer records himself saying: "there are reports in western media that construction has stopped, but as you can see, it has not!" If you have a source which shows no construction, then please provide it and cut the BS.

If revenues are realized before the property gets delivered, then who cares whether construction is behind schedule or is done "all at once." It costs less to construct slowly instead of quickly. Also, it gives developers more time to complete presales.

You make some unsubstantiated arguments to which I felt obliged to respond to:
1) Canary Wharf in London was built from scratch (1991 to 2003)... "You also don't build a financial center from scratch."
2) Hudson Yards is a $20 billion investment adding 12-13 million square feet to Manhattan's skyline ... "nobody rational builds 50 high rise office buildings all at once."
3) Pudong was rice fields 20 years ago, when development began "where there was no commerce before" in Shanghai and the peace hotel was the tallest building at 10 stories.

I think the argument you are trying to make is that Yujiapu will flop. That may be the case; it really depends on the revenues that developers have been able to realize thus far. Why don't you lay off the opium and try to figure that out.

Also, I look forward to reading your estimates on: "How much iron ore and met coal did it take to build this financial center? How many dry bulk carriers would that have filled? How do those quantities of ore and coal compare to the output of a mine?"

Hang Hong said...

The idiot who made the video says that construction hasn't stopped, but it had. He has no idea how busy a construction site like that should be. It was a ghost town.

CP said...

It's definitely unusual for China apologists to try to claim that Chinese don't build any unnecessary buildings. Especially now, in late 2014.