China’s Real Estate Strong but Not Overheated

China’s Real EstateChina is beginning to show renewed growth. The country is focusing on stimulus spending and easy monetary policy in hopes of getting its economy back on track and driving its consumers to spend.

And while there has been talk of an asset bubble in China’s real estate market, my view is that the short-term risk is high, but there is excellent long-term growth potential in China’s real estate sector. (For my views on China’s retail sector, read “Luxury Retailers Loving China.”)

Investment in the country’s housing market surged 61.7% from January to November, based on the data from the National Bureau of Statistics.

There are over 300 million middle-class consumers in China, and as a group, they are hungry for a lifestyle similar to middle-class consumers in the West. Real estate is a key goal for the Chinese.

Standard & Poor’s analysts believe the real estate market in China is stabilizing, with buyers returning while home prices continue to decline.

And in an ironic twist, at a time when California’s real estate market is struggling, the state’s California Public Employees’ Retirement System (CalPers), a pension fund, announced it would be investing about $530 million in two new China real estate funds managed by ARA Asset Management, which is longer-term positive.

To play China’s real estate market, you can take the more conservative approach and buy The Guggenheim China Real Estate exchange-traded fund (ETF) (NYSE/TAO), which has a year-to-date return of 53.1% as of November 29. The fund holds mainly large value-oriented Chinese real state stocks.

TAO Guggenheim China Real Estate ETF stock market chart

Chart courtesy of www.StockCharts.com

To take a more speculative and potentially higher return opportunity, an emerging small-cap Chinese real estate company that I like longer term is Xinyuan Real Estate Co., Ltd. (NYSE/XIN).

Xinyuan is down from its 52-week high of $3.95 on April 3, 2012 and has outperformed the S&P 500 over the past 52 weeks.

XIN Xinyuan Real Estate Co. Stock market chart

Chart courtesy of www.StockCharts.com

Xinyuan buys land and develops large-scale, high-quality residential real estate projects that are targeted toward the growing middle class in China’s Tier 2 cities. The company looks for cities that are large and growing, with developed urban areas.

Targeted cities have above-average gross domestic product (GDP) growth and population growth, and they currently comprise strategically selected Tier 2 cities, including Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Chengdu, and Xuzhou. Combined, the populations of these cities total over 34.5 million people, according to Xinyuan.

Projects include multi-layer apartment buildings, sub-high-rise apartment buildings, high-rise apartment buildings, retail outlets, leisure and health facilities, kindergarten facilities, and schools.

Xinyuan also purchased a development site in New York City for $54.2 million via its U.S. development unit, XIN Development Group International.

Annual sales grew sequentially in each year over the past nine years. Sales grew from $12.8 million in 2002 to $688 million in 2011. Xinyuan has been profitable in seven of the last 10 years, including increases in the last three years.

Be advised that any stocks mentioned in this article are meant only for illustrative purposes and should not be construed as a recommendation.