China’s real estate sector is a key component of the country’s economic activity, making up ~11% of its gross domestic product (GDP). Changes in real estate activity have historically trended with the overall economy. The importance of the real estate sector also applies to the United States. In the past, economic recoveries in the United States have accompanied recoveries in the housing market. Because China is the largest importer of iron ore and second for coking coal used to make steel, a key material used to construct buildings in China, China’s real estate activity positively correlates with shipping demand.
Real estate climate edges lower in May
In June 2013, China’s real estate climate edged up slightly from 97.29 in May to 97.29. The composite index was developed by China’s National Bureau of Statistics, and it measures the aggregate business activity for land, capital, and sales of real estate, which is useful in showing the trend of the Chinese real estate market. Figures above 100 show prosperity or economic growth, whereas figures below 100 mark depression.
Lower figures have followed the implementation of property tightening measures, as the government raised concerns regarding rising property prices in February. These measures include restricting loans to real estate developers and individual buyers, as well as imposing taxes on home sales. As a result, the real estate climate index has been falling for the past few months.
Short-term negative in a long-term up trend
The rebound, whether temporary or not, is encouraging news for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Partners LP (NMM), and Eagle Bulk Shipping Inc. (EGLE). While activity has fallen over the past few months, which was a negative, the light weakness (marked by slight declines rather than large drops) suggests the government doesn’t plan to hurt the real estate market. As current levels are below the post-2000 average of 102, long-term fundamentals remain favorable. The fact that the real estate climate isn’t falling sharply suggests the long-term trend remains intact.
Real estate investment turnaround
Furthermore, investments in real estate development during the first five months of 2013 remain solid. Perhaps more interestingly, the growth rate of land purchased by real estate enterprises jumped significantly from -22.8% during January to March 2013 to -8.6% during January to April compared to the same periods in 2012. January to June’s data is also encouraging.
While several industries tied to the real estate sector, such as iron ore and coal, have fallen due to current weakness in China’s real estate sector, it’s unlikely that the government will enforce a much tighter policy that will hurt the broader economy. Current data also shows the government isn’t willing to do so. This would be positive for investors who are seeking long-term investments in shipping companies, as demand for dry bulk imports—such as iron ore and coal—should continue to grow over the long run.
© 2013 Market Realist, Inc.