The sheer magnitude of building growth in China has been remarkable. According to the Financial Times, China produced more cement in just 2 years, 2011 and 2012, than the United States produced in the entire 20th century. China’s unprecedented urbanization has resulted in hundreds of millions of migrants flocking to China’s cities to manufacture the country’s exports and build its infrastructure. This, in turn, has driven an unsustainable combination of a gravity-defying growth in construction coupled with rapidly rising housing prices. If China is indeed in a property bubble, the correction could be painful.
Concerns about a Chinese property bubble were raised as early as 2010. Ordos, a city in Inner Mongolia, undertook an ambitious project to develop a 12-square-mile area of empty land outside of the city into a thriving metropolis. Rather than a thriving metropolis, the $1 billion project resulted in a ghost town when the project failed to attract residents. In early 2011, when banks tightened credit, coal companies, upon which the resource-rich city depended, consolidated. As a result, property sales stalled, precipitating a collapse in prices. Ordos wasn’t the only casualty. Several other major cities throughout China experienced price declines, leading many, including The Wall Street Journal, to declare the end of the property bubble in China to be imminent.
Impact on Smart Buildings
Indeed, prices did retreat in 2011. But rather than burst, they rebounded, buoyed by sustained demand in China’s top cities. But recent weakness in Chinese economic indicators has again raised concerns of a burst. Economists at the Japanese bank Nomura have declared, “it is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be.” Newly started construction for the first 4 months of 2014 is down 22.1% compared to a year earlier. Even Pan Shiyi, a real estate tycoon and chief of Soho China, thinks China’s property market is headed for catastrophe.
The exceptional growth of construction in China has been a strong driver of building controls and automation in recent years. A property bubble burst could, therefore, have disastrous consequences on the market for smart building technologies. However, if there is softness in the Chinese market, no one seems to have informed the leading global manufacturers of building controls. Honeywell, Johnson Controls, Schneider Electric, and Siemens have all reported a continued strong market in China for the first quarter of this year.
A Series of Collapses
Part of the story is momentum. A collapse in construction activity will lag a collapse in land and property prices. Controls equipment manufacturers may even lag behind construction activity. Also, although indications of a plunge in construction prices are strong, it hasn’t occurred yet. China has been in the position of having economic data pointing to it being on the cusp of a property bubble burst before. Its chronic oversupply and perpetually buoyant prices may be unsustainable, but the market can remain irrational longer than you can remain solvent.
When the burst does come, advanced controls may prove to be more resilient than the overall market. China has a significant proportion of aging buildings. If the country is to reach the energy efficiency goals laid out in the 12th Five-Year Plan, advanced controls will need to be part of the equation. Those aging buildings will be prime candidates (and great revenue sources) for energy efficient retrofits.