Do Chinese Real Estate Stocks look Attractive for the Long Term?

It looks as if the U.S. real estate market is limping back to normalcy. But at the same time, Mainland China may well be looking at a possible real estate crash. A bit of success has been achieved by the Chinese government in attempting to cage the increase in prices in the housing sector. While there is a bit of risk as far as the short term is concerned, the long term growth in this sector of China looks quite positive indeed.

Amongst the varied Chinese consumers, about 300 million people or more constitute the middle-class and they aim for a good lifestyle, for which real estate is a chief target. According to the analysts of Standard & Poor’s, the prices of homes in China are on the declining trend and this has paved way for the return of buyers in the steadying real estate market.

On the other hand, it is well known that the real estate market is facing difficulty in California. So is it not peculiar that its state pension fund – the California Public Employees’ Retirement System (CalPERS) has revealed its interest of investments to the tune of $530 million in ARA Asset Management-managed two new China real estate funds, which could be nothing but positively for the longer-term? (Source: Forbes, September 24, 2012 titled “California State Employees Bet on China Real Estate.”)

In order to be more cautious in the Chinese real estate market, one could consider investing in the exchange traded fund of Guggenheim China Real Estate (NYSE/TAO). As of August 30, this fund has a year to date return of 25.5% and its holdings constitute large Chinese real estate stocks that are value-oriented.

There is another small-cap real estate company in China that is emerging in the market; Xinyuan Real Estate Co., Ltd. (NYSE/XIN). It has a market cap of $200 million and presents an opportunity of speculation and possibly high profits; especially after having outperformed the S&P 500 over the past 52 weeks; although this stock is currently seeing a low after its fifty-two week high of $3.95. This company is into the business of buying and developing land into large scale and top quality residential projects. Its clients are mainly the middle class citizens of the China’s growing II tier cities which are significantly sizeable and sufficiently urbanized. The company seeks those cities having a GDP that is above average along with a good growth in population. Examples of such cities whose pooled population is above 34.5 million people are Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Chengdu, and Xuzhou.

There are apartment buildings of various types: multi-layered, sub-high-rise, high-rise, etc. There are also retail outlets and facilities for education, leisure and health. All such projects are undertaken by the Xinyuan Real Estate Company. The company’s latest acquisition has been through its development unit in the United States named XIN Development Group International. It is a $54.2 million development site in New York City; which speaks volumes of the company’s strengths and hence potential profits.

Out of the past seven years, Xinyuan has seen profits for seven years; the last three years exhibiting the maximum increasing levels of the same. The yearly sales have shown continuous growth per year for nine years. (In the year 2002, the sales were $12.8 million; while the year 2011 saw their figures touch $688 million).
If we consider the projected or estimated earnings of Xinyuan for 2013, it looks like the current trading value is quite cheap; at a price-to earnings multiple of twice the estimated earnings of $1.45 per diluted share. This low price to earnings makes up for the risk factor that is associated with China.

As with any investments, it is always sensible to analyze the company in question and learn about its history and current position in the market. After all, there is a risk factor associated with any such trading and the future may not necessarily be a repetition of the past; especially where profits are concerned!