Public Housing Garden's in Xi'an, China

December 27, 2019 by Bradley Calder

My Chinese teacher, Minna Zhang, lives in Xi’an China. Xi’an is the capital city of Shaanxi Province in Central China with a population of about 12 million people. Minna grew up in a rural area (农村) about 4-5 hours from Xi’an. She is the first person in her family to graduate from college (Shaanxi Normal University in 2016).

Upon graduating, Minna was worried about where she would live next. Typically, fresh graduates make about 4,000 RMB per month in the Xi’an area and rents in the city center can easily come to more than 2,000 RMB per month.

In the past, fresh graduates would often choose to live in partitioned houses (合租房) these homes are typically converted 1 bedroom or 2-bedroom apartments with shared bathrooms and shared kitchens for multiple units. The rents for these homes are lower than the traditional housing market, but the living conditions can be challenging.

Fortunately, Minna had the opportunity to participate in a new type of public housing program in Xi’an. Starting in 2015, Xi’an began building public housing (公租房) targeting recent college graduates. The purpose of this program is to attract and retain university students in the Xi’an area. Minna’s apartment is a comfortable 43 m^2; 1 bed, 1 bath, kitchen, and living room. Her rent is 300 RMB per month and has not increased. Her public housing garden (公租房小区) contains 25 buildings, each with 33 floors and about 25 units per floor (about 20,000 units). Within the garden itself, they have public meeting areas and even a kindergarten, though it is mostly empty as most of the residents have yet to have kids.

Her public housing garden’s culture is warm and inviting. Everyone in the garden is 22 to 26 years old. Residents join WeChat groups for various interests ranging from singing, sports, studying, and group activities and trips. Having so many young people around makes dating much easier and the party scene is strong.

The biggest drawback to living in her public housing garden is its location. The garden is about a 1-hour drive from the city center. Today, no subway line reaches their area; however, a subway connection should be completed within the next 3-4 years. She was initially worried that the public housing garden would under-spend on maintenance, however she was pleasantly surprised. The government contracted out maintenance (物业) to a third-party service that’s provided her with prompt repairs.

It remains to be seen whether the Xi’an government will allow her to purchase her home. There are rumors that the government will allow residents to purchase their homes, but no firm indication as of Dec 2019.

Overall, Minna believes the public housing garden positives vastly outweigh the negatives. She expects and is excited to continue living in public housing for many years to come.

Residential Real Estate in Ho Chi Minh City, Vietnam

March 03, 2019 by Bradley Calder

I first traveled to Ho Chi Minh City, Vietnam in February of 2011. At the time, virtually all vehicles on the road were motorbikes, side walk space was limited, and most real estate was two to four story residential buildings with the first floor used as commercial space. Vietnam's nominal GDP was $116 billion ($1,300 per capita). Though poor, to a foreigner with experience living in China, Vietnam's Confucian work ethic was readily apparent. Everyone seemed to be constantly busy and moving fast.

Just last week, almost eight years later, I returned to HCMC and saw an enormous degree of change, cars, skyscrapers, branded clothing stores and Starbucks abound. According to the IMF's 2018 data, Vietnam's GDP grew to $241 billion (about $2,500 per capita) more than doubling since I last visited. Vietnam's skyline is very different from when I last visited with many tall buildings completed and many more under construction. The percent of the population classified as urbanized has increased from about 30% to 35%, meaning an additional 4.5 million people have moved from rural areas to cities.

Education and Labor

Vietnam's education system has proved to be highly effective resulting in near universal literacy. Additionally, Vietnamese students tend to perform well on standardized tests in math and science, exceeding the OECD average.

I heard throughout my trip that one of the few benefits of Vietnam's experience with socialism was that it resulted in a high level of female enfranchisement into the workforce. This results in a situation where Vietnam is effectively utilizing all of its top human capital, rather than only utilizing human capital that happens to be male.

Family Formation and Home Ownership

Vietnamese, like other East Asian cultures have a strong preference for home ownership. Currently, home ownership rates in Vietnam are above 90%. Given that incomes have been growing rapidly and both men and women work. Upon getting married, Vietnamese couples will have both the resources and desire to move out of their parents' home and buy their first apartment.

Vietnamese Real Estate Industry

Entrepreneurs anticipating Vietnam's demographic and cultural preferences for new homes have formed real estate development companies. Both foreign and local real estate companies compete for land, development licenses, tenants and capital in Vietnam. One helpful heuristic that I’ve found to quickly understand the nature of a local economy is to look at the industry sector weights by market capitalization. The chart below indicates that 38% of Vietnam’s market capitalization came from the real estate industry.

Furthermore, two of the three largest public companies by market capitalization in Vietnam are in the residential real estate industry, Vinhomes and Vingroup. Both are controlled by the same entrepreneur, Pham Nhat Vuong, the richest person in Vietnam. Clearly residential housing demand is a big business opportunity for sophisticated real estate developers and institutional investors; but I wondered if it was possible for foreigners to buy property in Vietnam?

Buying a home in Vietnam on WeChat

I used WeChat to locate a real estate broker named Sarah Gui (WeChat: sarah7_722) who caters to Chinese people that are interested in buying property in Vietnam. During my conversation with Sarah we discussed regulation, taxation, where to buy in HCMC and what opportunities are currently available on the primary market.

Firstly, it is possible for foreigners to buy property. In 2015, the Vietnamese government clarified the law and set up a system to allow foreigners to legally purchase property. There are some important distinctions between the property rights of local Vietnamese and the property rights of foreigners.

Incidentally, I was told that the primary reason for preventing foreigners from levering their purchases is to reduce the risk of a housing bubble and to maintain home price affordability for local buyers who are much less capitalized.

HCMC Location Guide

HCMC is separated into many districts as indicated on the map below. I also included a satellite view of HCMC taken by astronaut Scott Kelly.

District 1, D1 is best thought of as the intersection of main-street and main-street. As HCMC’s central business district and the most densely populated area, life here reminds me of Puxi, Shanghai. Recently, a Hong Kong based company called Alpha King bought up 30% of the land in D1, resulting in a doubling of property values in the last three years.

D2 and D7 are both popular with foreigners because of their strong international schools as well as a less dense environment. A significant component of D2 known as the Thu Thiem peninsula remains undeveloped. Nonetheless, Chinese buyers and developers are excited for the day when Thu Thiem get’s the green light from the government and they can try to create another Pudong. The chart below describes the long term plan for Thu Thiem.

D7 has much unoccupied land and is being developed by a Taiwanese company. One project on the market in D7 is called Eco-Green Saigon, it has 4,000 apartments and 6 total buildings. I attached the marketing materials for Eco-Green Saigon here.

D4 is an older district popular with many local people but with aging real estate and limited land supply for further development, however the location is considered excellent due to close proximity to D1’s CBD.

D9 is HCMC's high tech zone and is the direct recipient of much of the technology and manufacturing FDI going into Vietnam. Today, companies like Intel, Samsung, Schneider all have large manufacturing, design and engineering offices there. Vinhomes/Vingroup is building the largest residential real estate development in all of Vietnam in this area. The massive project called “VinCity” will have 44,000 units and 71 total buildings. I attached the VinCity marketing materials here and the master plan is below.

During my conversation with Sarah, I asked her to sketch out the current prices and yields in each district. She described the following prices below. Property prices in Vietnam are significantly cheaper than China’s first and second tier cities, and likely explains the strong Chinese demand. Very high yields relative to what is available in their home countries likely explains demand from Japanese and Korean buyers.

Deal or no Deal?

Suppose one wanted to buy a 75 SQM apartment in VinCity and act as a land lord for the next 35 years, under what conditions might this proposition result in an attractive investment? I constructed a basic financial model to help frame the problem. I estimated a probability weighted, unlevered, IRR of 7.8% and MOIC of 6.4x. Note that there are no capital gains taxes in Vietnam.

Supply and Demand Elasticity

D1’s housing supply will likely remain inelastic. Because Vietnamese own their property and land freehold, large scale redevelopment in D1 is susceptible to hold out problems. In contrast, supply elasticity should be much higher in D2, D7 and D9 given the large quantity of undeveloped land. As such, I reckon one should be relatively more cautious about owning property in these areas.

In summary, Vietnam has improved dramatically in the last eight years. People are getting richer, moving to the cities and buying homes. I am optimistic that Vietnam will be able to learn from China, Korea, Taiwan, Singapore and Japan’s development experience, resulting in continued growth.

My friend translated this article into Chinese, click here for the Chinese translation.

Real estate: to own, or not to own

March 11, 2018 by Bradley Calder

I was first exposed to the real estate business through my grandpa and grandma. While I was in my early teens, my grandparents both worked as real estate agents in Long Island, New York. They were locally known as “The Dream Team.” One day after school, my grandpa took me out for a slice of pizza and I asked him to explain his work as a real estate agent.

Grandpa Jerry explained, “A real estate agent helps people buy and sell homes. In exchange for their help, the real estate agent keeps a small percent of the transaction price when a home is bought or sold. To put this “small percentage” in perspective, imagine you receive a small slice of a normal sized pizza, you can eat for a day. But if you receive a slice of pizza the size of a house, you can eat for a year.” My grandpa and I both love to eat pizza, and his explanation stuck with me.

For the last eight years, I’ve participated in the residential real estate market as a renter in Shenzhen, New York, and Cambridge. When you agree to be a renter, you agree to pay a fixed amount of money each month to live on your landlord's property. In exchange, the landlord needs to provide the renter with selected amenities and agrees to cover any capital expenditures required to mitigate wear and tear.

From a theoretical perspective, paying rent is very similar to entering into an interest rate swap contract. In this contract, as the renter, I agree to pay fixed, and my landlord receives floating. The landlord collects a fixed rent, pays variable expenses, and most importantly receives a floating rate of return equal to the capital gains or losses that come from changes in the property's market value. More recently, I've been re-thinking my decision to pay fixed and have started to think about taking the other side of the swap.

Of course, there is an academic answer to the rent/buy decision. The challenge is that the answer entirely depends on your assumptions. While these assumptions are uncertain, they can be estimated with varying degrees of precision. My friend Ben Willinksy recently passed me a model that the NYT created that helps you easily evaluate the theoretical approach to the rent/buy decision. The drawback to this tool is that it has 20 input assumptions. Like all assumption driven valuation models, slight changes to some of these assumptions can lead to a wide dispersion of outcomes.

I’ve always felt this theoretical approach to answering the rent/buy decision to be unsatisfying. A more satisfying approach would help me answer questions like:

How good of an investment has buying a home been historically?
What is the relationship of housing investment returns to other asset returns (stocks, bonds, cash, etc.)?
What is the relationship between housing and inflation?

I wanted to approach the rent/buy decision empirically rather than theoretically. Remarkably, there was little long term research on housing returns until quite recently. In November of 2017, a team of five economists working in Europe and the US published a paper that comes a long way to bringing an empirical perspective to the rent/buy decision. The paper wonderfully titled, “The Rate of Return on Everything: 1870-2015” asks the question, what is the rate of return on the four core investible assets in the economy?* The researchers analyzed the real and nominal rates of return for Treasury Bills, Treasury Bonds, Public Equities, and for the first time, residential real estate for 16 countries from 1870 to 2015. Collecting and cleaning this data alone was a huge achievement.

From this data, we can look at the historical returns, volatility, and correlations for each of the four core asset classes. I extracted the charts below from the paper and they help to provide a sense of the shape of the return distribution for each of the four asset classes. I pay special attention to housing below.

As is clear from the charts above, the average public equity market total return for this period was about 7% real and the average housing return was also about 7% real.** Even more intriguingly, housing returns appear to be lowly correlated with public equity markets and considerably less volatile. Housing also appears lowly correlated with inflation while equities are negatively correlated with inflation. Modern portfolio theory suggests if there are two assets with similar returns but low correlation with one another, then it is a strong argument for owning both assets.

The critical risks which could cause total capital loss to a housing investment are tail events including political risks, local economic decline, natural disasters and a sudden need for liquidity at a time when there are few interested buyers. Assuming these risks do not materialize, my instinct is that over long periods of time you are likely to receive a real return comparable to the returns described above.

The real housing returns described above include both rental income and capital gains. However, a landlord receives rental income only if they have a renter living on the property. If a home is owner occupied, then the owner only receives the capital gain return and the rental income is instead enjoyed as the benefit of living in the home. The chart below details the nominal returns for housing, decomposing it into capital gain and rental income. Looking only at the capital gain return gives us a good sense of what outcome we can expect should we become a landlord and live on our property.

So what should you expect as a homeowner? Nominal returns of 3.5% to 8.5% with an average of 5.7% over the sample period with half the volatility of equities. If the rest of your portfolio is composed of bills, bonds, or equities, these characteristics are even more intriguing. If you have the desire to become a landlord and manage renters, your returns can be considerably higher and the rental income comes with a volatility profile considerably lower than treasury bills which are often described as a risk-free asset.

After reading this paper, I am reasonably confident that taking the floating side of the swap is the optimal long-term decision.

End Notes:

*The paper was written by Oscar Jorda (Federal Reserve Bank of San Francisco and the University of California Davis), Katharina Knoll (Deutsche Bundesbank), Dmitry Kuvshinov (University of Bonn), Moritz Schularick (University of Bonn), Alan Taylor (University of California Davis): Link to the paper is here.

**For reference, real returns are defined as nominal returns minus inflation.