Near Medium Term in China

Slide 1

As can be seen from the slide, we refer to Shanghai Stock Exchange Property Index as the approximation for the real estate returns in China. We use 6 indicators, which are:

1. Real GDP Growth rate

        We pick this factor because Real Estate plays a significant role in shaping the economy and GDP

1. Inflation rate

Because, according to Gordon, real estate can be considered a perfect hedge against inflation.

1. Interest rate

Interest rate has a major impact on the real estate markets, because it influences the cost of financing and mortgage rates, which in turn affects property cost and values

1. Earning growth

We use EPS growth as one of the indicator as this is a good indicator to identify profitability

1. Momentum

        Momentum is considered as one of the factor to take time lag into account

• We treat the momentum as a dummy, where the momentum is 1 if the last year Shanghai Property Index return is positive and 0 if the last year return is negative.

1. Return on Shanghai Stock Exchange Composite Index.

        Because the SHPROP is influenced by the SHCOMP

Slide 2

• Based on t-value written below the model, it appears that interest rate, momentum and equity return are statistically significant
• In addition, it can be concluded that interest rate has a major effect on the estimation for the real estate return.

• From the graph below, as josceline mentioned about the falling interest rates in the next one year affect the decrease on real estate return
• The return forecast for the next 2 years appears to be flat because of the poor macroeconomic forecast by IMF
• However, SHPROP return is forecasted to rise around 25%  in the following year because of the increase in forecasted interest rate starting from 2018, which is the most significant factors of real estate return in China.