China’s Building, but Will They Come? Ghost Cities
May 7, 2013

This post is also available in: Chinese (Simplified), French, German, Italian, Spanish

Some of you may have heard or read about the current state of the real estate market in China, often covered in a sensationalistic way, with talk of “ghost cities” and “bubbles” ready to burst and so forth. These types of reports can cause quite a jolt in the market, which is what we saw happen, probably not coincidentally, after a popular US television newsmagazine aired a somewhat negative report in March. But as I’ve said many times before, there’s often more to a story; important parts can end up on the cutting room floor.

I was in China a few weeks after the aforementioned television report of the country’s “ghost cities” and the supposed real estate bubble ready to burst there, and was surprised to pick up the newspaper with the headline “Property Prices Rising.” The article didn’t mesh with what the Western media was reporting about the situation. So what’s the truth? No question, there are towns (some city-like) with empty buildings for the world to see. And, there certainly have been cases of poor planning and overbuilding. But as my team and I traveled around China, it was clear to us that those represent a small sample of projects and not the country as a whole.

Myths and Realities

One of the reasons there are unoccupied apartments or homes in China is because many Chinese treat investing in property as a means of saving rather than putting money in the bank at low interest rates, or investing in the stock market, which many consider too risky. Property is something they can see and perhaps eventually use for themselves or their children. And given the very high savings rates in China, there are many who are able to pay cash for property investments and sit on empty apartments indefinitely.

More importantly, families across China need and demand affordable housing near work and school centers.

The so-called ghost cities are fairly easy to identify, and Ordos in the Inner Mongolia province is probably the most famous. Ordos has very rich mineral resources and the highest GDP per capita in China. Since the Ordos government became very wealthy on the back of a booming economy, it poured a lot of money into infrastructure and public projects, including a new town 25 kilometers from its old town in a sparsely populated desert area known as the Kangbashi New District.

The New South China Mall in the Guangdong Province is another so-called “ghost city.” It’s located on the outskirts of Dongguan, which once was called the “world’s factory” because of the large number of labor-intensive toy, garment, textile and other industries located there. But as wages rose, the factories started moving inland to smaller cities where wages were lower and workers plentiful. Since migrant workers once accounted for 80% of the population, when they departed, the mall designed with them in mind became useless. In addition, Dongguan lies between Guangzhou, the capital of Guangdong Province on the west, and Shenzhen, another new city on the west, both more popular destinations for shoppers.

In the Tianjin Municipality, Yujiapu is another “ghost city.” Local officials planned to make it a key financial center, the “Manhattan” of China, but with Shanghai, Beijing, Shenzhen and Hong Kong competing, their chances turned out to be slim. The RMB 450 billion in government loans used to launch the project will not be easy to repay.

Construction in Beijing

Those places are the exception, not the rule. We must remember that China has a population of over a billion people, an urban population of about 700 million and 100 cities with over one million people. You just have to walk the streets of its cities, as we have done, to realize that there is a plethora of substandard housing and a need for urban renewal. For the right price and location, there is tremendous demand for housing in China. Apartments for sale in the US$50,000 range are affordable for many Chinese workers. With some 18 million people migrating to the cities each year and with real economic growth of 8% expected in 2013 and 8.2% in 2014,1 we think you could make a case for continued demand in this area.

The government continues to plan for great urbanization and anticipates some 300 million more people will move from the rural areas into cities in the next 10 years. If we assume that each person needs a minimum of 10 square meters of living space, this trend represents a potential demand of more than three billion square meters. Many older buildings also need replacement, so that figure could magnify if even-roomier dwellings are considered.

I have seen how quickly investor sentiment can shift, and I have oftentimes found that when everyone else is panicking about some news headline, potential bargains can be unearthed. China’s new administration is now just getting its game together and I think we’ll see more investment and activity in the right areas. I’m encouraged by the swift reaction—and action—to address investor concerns in this area and remain bullish on China’s long-term potential.

As I said, it’s not all gloom and doom and ghost cities springing up in China. I have more thoughts to share on cities that are thriving from China’s building boom, which I will share in my next post, so stay tuned!

Important Legal Information

Investing in real estate securities involves special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector.


1. Source: International Monetary Fund, April 2013.

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