Skyscrapers Curse — Continued

If you don't know about the Skyscrapers Curse, please read the previous posts I've written on the topic. Beyond that, I don't much more to add than the fact China and world are set for a major economic collapse of historical proportions.

Let's start with China:

Feb. 28 (Bloomberg) -- Shanghai Greenland Group said it may add more floors to China’s second-tallest building under construction to turn it into the highest in the world after the Burj Khalifa in Dubai. 

The closely held company set up in 1992 may increase the height of Greenland Center in the central city of Wuhan to 636 meters (2,086-foot) from 606 meters, said Wang Xiaodong, Greenland’s Shanghai-based spokesman. That will exceed the 632- meter Shanghai Tower also scheduled to be completed in 2014. 

China is home to 53 percent of all skyscrapers being built around the world, up from 44 percent a year earlier, Barclays Capital Research said. The country will increase the number of skyscrapers to 141, from the current 75, by 2017, according to the bank’s annual Skyscraper Index report in January. 

“The local government in Wuhan actually has a stronger intention to revise the plan, but it’s not easy for a skyscraper like this,” Wang said in a phone interview today, adding that the plan may be finalized by the end of the year. 

The Greenland Center broke ground on the project in December 2010 with a planned investment of 30 billion yuan ($4.8 billion). The development will include luxury hotels, apartments, and a conference center, it said. The building is on track to be completed in two years, Wang said, declining to say how much costs will be added with any revision to the plans. 

And then Vietnam:

Vietnam’s Skyscraper Keangnam to Drive Hanoi Rents to 5-Year Low
Feb. 28 (Bloomberg) -- Vietnam’s Keangnam Hanoi Landmark Tower, the tallest in Southeast Asia after Petronas Towers, is boosting prime office space in the capital Hanoi by half and threatening to drive rents to a five-year low. 

The property, which includes a hotel, luxury apartments and mall, is adding 100,000 square meters (1.1 million square feet) of office space, said Choi Yong-Ho, marketing manager of Keangnam Vina, the unit of South Korea’s Keangnam Enterprises Ltd. that built the 346 meters (1,135 feet) tower. 

[...]“The tower flooded the market with a lot of supply,” Fraser Wilson, Ho Chi Minh City-based director of Vietnam Property Fund at Dragon Capital, the biggest private investor in Vietnam’s stock market, said in an interview on Feb. 24. “That can only have a negative impact on the rents.” 

[...] The tower has the same height as the Center in Hong Kong and is higher than Shanghai’s Shimao International Plaza and John Hancock Center in Chicago, according to Council on Tall Buildings and Urban Habitat’s data. 

India's Skyscraper Boom Matchs China’s

We have been talking about the Skyscrapers Curve for 3 years now — see previous posts.

It's interesting to see it evolve, and see how the current credit bubble is global and how much the downturn will be painful due to the fact that these excesses are not only extreme, but are also worldwide.

The report mentions a Skyscraper Index Report from Barclays. I'd be curious to have a look at it. Wouldn't mind if one of you, dear readers, could forward that to me :-)

Here's the case of India. Bloomberg reports:

(Bloomberg) — 2012-01-12 — India, which is building the world’s second-tallest skyscraper, is catching up with China in an office building boom that may indicate that an economic slowdown is imminent, according to Barclays Capital Research.

India is scheduled to complete 14 new skyscrapers taller than 240 meters (787 feet) over the next five years from the current two, Barclays’s analysts led by Andrew Lawrence said in a report yesterday. China will increase the number of skyscrapers to 141, from the current 75, by 2017, according to the bank’s annual Skyscraper Index report.

Over the past 140 years, completion of the tallest buildings has coincided with periods of economic turmoil such as the Great Depression, the Asian financial contagion and the global credit crisis, Barclays said. China is home to 53 percent of all skyscrapers being built around the world, up from 44 percent a year earlier, according to Barclays.

“India, it seems, is playing catch-up,” the Barclays analysts, based in Hong Kong, wrote. “If history proves to be right, this building boom in China and India could simply be a reflection of a misallocation of capital, which may result in an economic correction in the next five years.”

The 720-meter India Tower will be the world’s second- tallest skyscraper when work on the building finishes, overtaking the 632-meter Shanghai Tower that is scheduled for completion in 2014, according to the Council on Tall Buildings and Urban Habitat. Dubai’s 828-meter Burj Khalifa is the world’s tallest building. 

[...] More than half of China’s skyscrapers will be built inland and away from the wealthier coastal areas and Pearl River Delta region by 2017, indicating a move toward second-tier and third- tier cities, according to the Barclays report.

China’s home prices fell for a fourth month in December after the government reiterated plans to maintain curbs that include higher down-payment and mortgage requirements, according to SouFun Holdings Ltd. Housing values dropped in 60 out of 100 cities tracked by the nation’s biggest real-estate website owner, including the 10 largest cities such as Shanghai and Beijing.

The government said last month at an annual economic planning meeting that it won’t back away from real-estate industry curbs this year that are damping home sales and pulling down prices. The nation’s financial center of Shanghai and some other Chinese cities have also said they will continue to impose the home purchase restrictions this year.

The Skyscrapers Curse Should be Complete Now — Saudi's To Build a 1,000m Skyscraper

I have been posting regularly about the Skyscrapers Curse which I find is a very valid and interesting metric of the social mood and irrational exuberance of the crowd over the past century.

So what does the Skyscrapers Curse tells us about the economy when you see all the various "new riches" compete to build the tallest ever building? In remote place away from megalopolises? Hundreds of skyscrapers are being built in Asia and the Middle East, but certainly those in the Middle East are the more worrisome as it doesn't reflect any need due to population density for example.

A few weeks after Koweit, here comes Saudi Arabia who just announced they will build the tallest building in the world, reaching 1,000 m high.

I do not expect any other skyscraper trying to beat this one for this inflation/deflation cycle... Meaning that we have already probably reached peaked exuberance for this generation, and probably the next one (people from 15 to 50 years old today).

1,000 meters, or 3,280 feet. That’s two-thirds of a mile.

When the Kingdom Tower is built on the outskirts of Jeddah, Saudi Arabia it will not only become the tallest building in the world, it will shatter the old record. The current record-holder, Dubai’s Burj Khalifa, stands at 828 meters. At least 173 meters (568 feet) taller, sight-seers on the tower’s observation deck could see how long it takes for their spit to hit the top of Burj Khalifa (this is, if they weren’t hundreds of miles apart). The tallest building in the US, Chicago’s Willis Tower, is 442 meters tall, or 527 meters if you count the antenna. The One World Trade Center tower currently being built in New York will climb, including antenna, to 541 meters.

Not merely a mine-is-bigger-than-yours jibe to their neighbors, the tower is a part of an economic initiative to strengthen Saudi Arabia’s economy by diversifying away from crude oil. For those with the means, the Kingdom Tower will be the poshest of the posh. It features a Four Seasons hotel, Four Seasons serviced apartments, luxury condominiums, top class office space and the world’s highest observatory. Total construction area is 530,000 square meters (5.7 million square feet). Adrian Smith + Gordon Gill Architecture, a Chicago-based architecture firm, won the contract for the Kingdom Tower earlier this week. Smith already has experience with designing tallest buildings in the world. He designed Burj Khalifa while at another architecture firm. The final details of Kingdom Tower’s design are yet to be worked out, but construction is to begin immediately. The total cost for the tower is approximately $1.2 billion.

Now that’s some prime real estate.

Kowait to Build the Tallest Skyscraper Yet

Since 2009, we have been describing the Skyscraper's Curse, and it's with very much interest that I discovered, thanks to my friend SS this article (dating back from 2009) on Popular Science, describing Kowait's effort to build the tallest skyscraper yet.

The Skyscraper Curse is basically this tendency for the apex of irrational exuberance in human societies to be reached when the society decides to build the tallest buildings possible.

If you follow this link, you will find a lot more about the historical occurrences, and academic studies done around the Skyscraper's Curse.

Even the worst economy in decades can’t suppress the human urge to build. Today’s most ambitious projects are bigger and wilder than ever!



Name: Burj Mubarak al Kabir
Where: Kuwait
Cost: $7.37 billion
Estimated Completion: 2016
The Challenge: Erect a 3,300-foot building that’s strong enough to withstand 150mph winds

The Empire State Building claimed the world’s-tallest title for four decades. Today’s record-holder, the more-than-2,300-foot Burj Dubai, will be lucky to keep it for four years. The Kuwaiti government is about to break ground on the City of Silk, a designed-from-scratch metropolis on the Tigris and Euphrates river delta with a 3,284-foot tower as its centerpiece. At that height, winds could sway a conventional skyscraper like a tree branch and turbulent vortices could shake it to smithereens.

So instead of building one shaky tower, London-based architect Eric Kuhne designed the Mubarak skyscraper as three interlocking towers, each twisting 45 degrees top to bottom to help stabilize it. The inside edges of the buildings meet in the center to form a triangular shaft through the middle. No matter which way the wind blows, two of the three towers will always brace the building.

Although the three-pronged design keeps the high-rise from swaying, it doesn’t counter the choppy winds that whip around the uppermost stories, which can cause damaging vibrations. So Kuhne is trying something never before done on a building: giving it vertical ailerons, the normally horizontal flaps on the trailing edge of aircraft wings that control rolling motion. The ailerons, which are only three to six feet wide, run the full length of each edge of the towers and mechanically adjust to redirect the changing winds around the structure and scatter the vortices, mitigating vibrations.

The Mubarak’s size is intended to accommodate Kuwait’s explosive population growth, with seven 30-story neighborhoods stacked atop one another, each with apartments, offices and hotels, and four-story “town squares” linking them. Even the height has a cultural significance, Kuhne says. “One thousand and one meters for [the classic Arabian fairy tale] One Thousand and One Nights. It’s the difference between bragging rights and telling a story.”

ElliottWave, the Skyscrapers Curse and China

I have been posting regularly about the Skyscrapers Curse which I find is a very valid and interesting metric of the social mood and irrational exuberance of the crowd over the past century.

In this month's ElliottWave's Financial Forecast, Steve Hochberg and Peter Kendall provide a similar analysis:

It takes a large surge in positive social mood to motivate people to erect the world’s tallest buildings. When the cooperative efforts of builders, business and government manage to literally push to the sky with the construction of a record-tall building, social mood is almost certainly at high tide. This tendency is tightly grafted to bull markets in stocks, back through at least the late 1920s, when the construction of the Empire State Building topped off the Roaring Twenties. At the outset of the more recent mania era, EWI made the connection between the epic rise in stocks and a burgeoning wave of skyscraper development, which continues to play out. In September 1996, for instance, EWT noted that expanding efforts to build the world’s tallest building are “assertions of power” and signs “of an arrivest culture.” EWT added that these buildings are often finished “after the bear market has begun.” The chart on page 249 of The Mania Chronicles shows that this is exactly how the great peak panned out. Kuala Lumpur’s Petronas Towers claimed the world’s tallest title in 1996, followed by Taiwan’s Taipe 101 and Dubai’s Burj Dubai, now known as the Burj Khalifa (after the Dubai development authority had to be bailed out). In each case, the plans for the buildings were announced as the stock market for each respective country raced toward all-time highs, and each building was completed during subsequent bear markets that are still in place.

The greatest skyscraper boom, however, belongs to China. The current tallest building in China, Shanghai World Financial Center, reached its full height in September 2007, a month before the Shanghai Composite’s peak. This is another stock market high that remains intact. Incredibly, the peaking positive mood motivated construction of the Shanghai Tower, which will become China’s tallest building at 2,074 feet high. It was started as the Shanghai Composite rallied sharply toward a countertrend high in August 2009. It will be just 700 feet short of the Burj Khalifa, still the world’s tallest skyscraper. But what the Chinese skyscraper boom may lack in record heights it makes up for in breadth. China already has six of the 15 tallest buildings in the world. By 2012, 34 of the 100 tallest buildings will be on Chinese soil. Most important, the construction of a new tallest building in China creates a giant non-confirmation with the country’s main stock average, which is still 56% below its 2007 all-time high, as the chart shows. Despite a weak stock market relative to the rest of the world, China’s still-raging skyscraper fever testifies powerfully to the unfettered optimism that surrounds its future. According to the estimate of an Australian trade specialist, for instance, China still needs “50,000 new skyscrapers over the next 15 years to cater to its expanding urbanization.” Yet, according to many other accounts, whole cities of vacant skyscrapers exist. We’ll stick with the perspective offered by the lagging Shanghai stock market, which is clearly unimpressed with all the building. The massive divergence between the Shanghai stock index and the Shanghai building boom suggests that China’s bear market, already four years old, will be one for the ages.

Chinese Bubble, the Skyscraper Curse, Gold and Bubblogy

I have been talking numerous times about the Skyscraper Curse for the past couple of years, and it's interesting to see that this idea is gaining momentum and credibility. Today, Yahoo published a post that deals with China's bubble and the Skyscraper Curve:

In China, five of the world’s ten largest buildings are now under construction. Look out below!, says Vikram Mansharamani, a financial services veteran and part-time academic who has developed a multidisciplinary framework for sniffing out bubbles.v

Mansharamani is author of a new book, BoomBustology: Spotting Financial Bubbles Before they Burst. The book is based in part on a course that Mansharamani, who has two master’s degrees and a Ph.D. from the Massachusetts Institute of Technology, has taught at Yale, his alma mater. [...] Mansharamani has developed a series of lenses through which to examine market behavior. Systematically examining outbursts of mania, from Dutch investors’ infatuation with Tulips in the 1630s to Florida real estate in the 1920, can help sniff out bubbles.

If you look through Mansharamani’s lenses, it’s clear to see there’s a bubble going on in China. Tall buildings aren’t just symbolic of reckless ambition. “Skyscrapers are manifestation of easy money, overconfidence, and hubris,” he says. And they are excellent indicators of a top. “In New York in 1929 there were three buildings competing to be the world’s tallest skyscraper,” he notes. In 1997, the massive Petronas Towers in Malaysia were completed just in time for the Asian financial crisis. The Burj Dubai rose in 2007 to snatch the title of world’s tallest building – just in time for the financial crisis to his the Persian Gulf.

Beyond skyscrapers, Mansharamani notes, “China today exhibits many of the signs that have characterized many of the speculative manias throughout history.” Those include: easy money, overconfidence, and high amounts of leverage. The rise of moral hazard is another indicator. “In China, you have state-owned banks lending to state-owned enterprises to buy land from the state,” he notes. (What could go wrong?) In addition, it’s always a danger sign when economic systems begin to regard what should be outputs as inputs.

Throughout China, provincial officials are obsessed with hitting targets for GDP. Focusing on what should be an end result as an initial goal “leads people to do things that may not make economic sense.” Mansharamani cites as an example a regional leader in China who, desperate to meet a GDP target, blew up a recently constructed bridge. “He got credit for the explosives he bought, and then for the steel and cement he bought and the constructions workers he hired.”

The question for investors during bubbles is how to know when to get out. And that’s one area Mansharamani hasn’t tackled. “I do think timing is a very difficult problem in terms of identifying popping of it,” he said. “I’m not sure it’s worth shorting China at this point in time, but it is definitely prudent to avoid it.” What’s more, he notes, countries and industries throughout the world that depend in large measure on China’s rampant growth are also potentially in danger.

Using Mansharamani’s lenses, one would conclude that the current gold market exhibits plenty of bubblicious signs. He agrees, to a point. A key development in any investment mania is when it crosses over from the province of professionals to a mass phenomenon. That’s happened with gold. “Walking around the city, you see a lot of people advertising that they want to buy gold,” Mansharamani said. “Everyone is talking about gold, and that is a late stage sign.”

Another worrisome sign is the way that an investment boom tends to feed on itself through leverage and financial innovation. Example: housing prices rise because banks lend against housing collateral, and the rising value of the collateral spurs people to borrow more against their homes. A similar dynamic is happening in gold. “The gold market has had tremendous innovation, in the form of exchange traded funds (ETFs), leveraged ETFs, and everything in between,” Mansharamani notes. This innovation has, in turn, affected the price of gold. The advent of gold ETFs, he notes, “has increased the demand for physical gold.”

But there’s one important caveat. Before talking about gold, we should note that “it is an unusual asset at so many levels.” As a sort of “anti-money,” Mansharamani argues, “it is a proxy for lack of trust in responsible monetary policy.” And in recent years, there’s been something of a bubble in that as well.

Academic Research about the Skyscraper Curse

I have already mentioned the Skyscraper Curse about Dubai in early 2009 and London in late 2010 and so I started investigating and looking for more info about this idea as I found it particularly clever and relevant, the most important I will share below with you:

It all got started in Jan 1999 by Andrew Lawrence, a research director at Dresdner Kleinwort Wasserstein who came up with the idea of the Skyscraper Index and its correlation with economic downturns:

The Skyscraper Index is a concept put forward in January 1999 by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, which showed that the world's tallest buildings have risen on the eve of economic downturns. Business cycles and skyscraper construction correlate in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession. (Skyscraper Index on Wikipedia)

I was amazed and surprised to find that Austrian Economist Mark Thornton has actually been studying the relations between the construction of record setting skyscrapers and economic cycles.

Mark Thornton has published two papers both available on the Mises Institute web site. Here are the links to the first and the second.

Here is the abstract of first paper:

The construction of skyscrapers that qualify as the “World’s Tallest Building” tends to coincide with major downturns in the economy. The Skyscraper Index, created by economist Andrew Lawrence shows a high level of correlation between skyscraper construction and the business cycle. Is this just a coincidence, or perhaps do skyscrapers cause business cycles? A theoretical foundation of “Cantillon Effects” for the skyscraper index is provided here showing how the basic components of skyscraper construction such as technology are related to key theoretical concepts in economics such as the structure of production. The findings, empirical and theoretical, suggest that the business cycle theory of the Austrian school of economics has much to contribute to our understanding of business cycles, particularly severe ones.

For those lazier among us, he has given numerous very interesting presentations about the historical and economics facts that lead to his conclusions. Embedded below is a 30 min must see session, presented at "Our Enemy, Inflation," the Mises Circle in Houstonon Saturday, 24 January 2009.

Below are a few more useful YouTube links, and I am not embedding in order to avoid an oversized post:

• Skyscrapers and the Housing Crisis [Mark Thornton] Presented at the Ludwig von Mises Institute's 2009 Mises University held in Auburn, Alabama. (50 min)
  
• Skyscrapers and the Housing Crisis | Mark Thornton Lecture presented by Mark Thornton at the Ludwig von Mises Institute's 2010 Mises University conference, the world's leading instructional program in the Austrian School of economics.
  
• Skyscrapers and Economic Cycles: An Interview with Mark Thornton (The Lew Rockwell Show #25)
  

London's Shard, Britain's new tallest building - revisiting The Skyscraper Curse

I wanted to mention London's Shard for quite some time already, as part of debunking UK's bubble economy, but I never had the time to... until today. The DailyMail is actually running a report about it today, so I'll take the opportunity to write the post I wanted to do.

[...] The Shard - Britain's tallest skyscraper - is shaping up to be something spectacular.
The 87-floor tower will have 44 lifts and will be topped by a four-floor viewing gallery that will be open to the public.

But yesterday the businessman behind the mammoth London tower - currently 72-floors high - said 'it's not all about height', and revealed how the building was first sketched on the back of a menu. 

Speaking from the 24th floor of the Shard - which when completed will be the highest in western Europe - Irvine Sellar said his building would be known for more than its altitude.
Mr Sellar, who is chairman of the Sellar Group, said: 'It's not an ego thing. We're not the tallest building in the world by a long way, but we are the best-looking in Europe.' 

The Shard, which last month outstripped Canary Wharf's One Canada Square to become the tallest building in the UK, is the highest-profile part of a broader plan for a £2 billion redevelopment of the area around London Bridge Station.

Fast backward to early 2006 now:

Feb. 6 (Bloomberg) -- [...] it's time to revisit thatever intriguing economic indicator: the Skyscraper Curse.


As this columnist has pointed out periodically, there’s an uncanny, if unscientific, correlation between financial crises and efforts to build the world’s tallest building. Look no further than Kuala Lumpur in 1997, Chicago in 1974, New York in 1930 and in biblical times with the Tower of Babel.


The human propensity for architectural overreach has been a surprisingly reliable omen. It’s not a stretch to think of such projects as visual punctuation marks. A giant billboard made of steel, glass, concrete and money. A common thread between skyscrapers and economic disasters has to be easy credit, which fuels irrational growth, valuations, and hubris.

So we've been talking a lot about the collapse of the UK real estate bubble and more generally speaking bubble economy based almost entirely on the real estate and financial sectors. Maybe that time has come.

Dubai Property Prices Will Continue to Fall for Many Years

I have been posting about Dubai for the past year, and so far, my forecasts have been quite accurate.

For about a couple years, I have been writing that Dubai was on the brink of collapse and mentioned the The Skyscraper Curse which I find to be very compelling.

Just a month ago, I wrote a post titled Some of Dubai's Office Buildings Will Be Empty Forever concluding that I wouldn't be surprised to see another 30 to 50% decline from here, in Dubai.

Here are some quotes from a Bloomberg report, giving more up to date information about the state of collapse in Dubai.

Dec. 15 (Bloomberg) -- Dubai property prices may drop for the next two years, extending a decline in the Persian Gulf sheikhdom that’s already cut values by more than 60 percent since the 2008 peak.

Residential values may fall as much as 20 percent more by the end of 2012 if new homes are built as planned, according to broker Landmark Advisory in Dubai. Cluttons LLP, a London-based property consultant, and Jones Lang LaSalle Inc., the second- largest publicly traded commercial property broker, also forecast further declines.

About 48,000 homes will come on to the market in the next two years, or about 12 percent of existing supply, according to Jesse Downs, director of research at Landmark. An influx of foreign buyers sparked a construction boom as prices rose by 79 percent to mid-2008 from 2007 before the financial crisis caused lenders to tighten credit and speculators left the market.

12 percent is quite a big number. I'd be curious to find out what's the current vacancy rate on existing properties.

“There is still no parity between supply and demand,” said Paul Richard, associate director at Cluttons in Dubai, which estimates that 35,000 homes will be completed through 2012. “You’re looking at a good two years” for Dubai’s market to reach bottom, he said.

[...] Home prices fell 6 percent in the quarter from the previous three months, Colliers International said on Nov. 7.

Almost half of Dubai’s planned real estate projects, from offices to villas, were canceled as buyers defaulted and access to funding became harder. Residents who lost their jobs had to leave the country within 30 days, causing many to abandon their cars and mortgages.

Well, that's actually a good news. It means that less money and resources are going to be wasted.

Emaar Chairman Mohamed Alabbar said last month that Dubai’s market has bottomed out “without a doubt,” and “not much” new housing supply is coming on the market.

Predictions of an end to the slump have proven overly optimistic in the past. In May 2009, Markus Giebel, then the chief executive officer of Deyaar, said the property market would bottom out that year. In the same month, Landmark Advisory said home values may stop sliding in the fourth quarter of 2009.

Economists are always making over optimistic predictions. No surprises here. But of course, no one is going to question the predictions of growth in the US and the rest of Europe, or profits and equity increases, etc.

“Without an influx of demand from outside the country, forget about it,” Cluttons’s Richard said. He estimates that home prices will drop 5 percent to 10 percent by next summer.

Attracting foreigners became more challenging after the government changed residency rules last year. From 2002, property ownership qualified the buyer for a five-year residency visa that was easily renewed. That changed in May 2009, when new United Arab Emirates regulations cut the length of residency visas to six months and required holders to leave the country and return for renewals, paying 2,000 dirhams ($546) per visa each time.

That was a very "clever" move indeed. I never understood why people would ever want to live in Dubai, except for making a lot of cash for a few years. But now, with a 6 month visa and more than $500 to renew it, it's become a hassle. Basically, they don't want to create an income tax, so they've came up with this hidden "residency tax" of $1000 per annum. Add admin and bureaucracy on top...

“The visa rules have been highly damaging and definitely shattered people’s confidence,” said Ludmila Yamalova, a partner at law firm HPL Yamalova & Plewka JLT. “Many bought property just because that would enable them to live here. They had their five-year residency and built their lives around it. Now they don’t have that security.”

Well, it was very clever to take a 25 or 30 year mortgage to get a 5 year residency in the first place. Things change, specially governmental promises: they never keep up their words.

[...] Downs predicts home prices will drop 15 percent to 20 percent by 2012 if the most residential buildings currently under construction go onto the market as scheduled.

“If the pipeline is delayed, that will only prolong the cycle,” she said. Properties won’t see renewed demand “until prices come down further and buyers have greater certainty over long-term rent yields.”

James Chanos: "We're not saying China will imminently crash but..."

James Chanos presentation has been uploaded on YouTube, which is great news for us. We get access to the real source instead of people reporting (and voluntarily or involuntarily modifying it).

If you want to learn about China, you have to watch this great presentation (about an hour worth of footage). It debunks a lot of ideas about capitalist China and how the economy and people are doing there along with teaching some valuable investment lessons.

Below is yet another report on Bloomberg about China and Chanos:

Feb. 22 (Bloomberg) -- [...] Huaxi is also emblematic of the country’s construction and real estate boom. Communist Party officials there are building one of the world’s 30 tallest buildings, a 2.5 billion yuan, 328-meter (1,076-foot) tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards, Bloomberg Markets reports in its April issue.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538-meter skyscraper that would today rank as the world’s second tallest. The only loftier building is the new Burj Khalifa in Dubai.

Such undertakings figured in warnings hedge fund manager Jim Chanos delivered in January that China is Dubai times a thousand. The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”

China has defied the global recession of the past two years and remained the fastest-growing major economy. Gross domestic product soared 10.7 percent in the fourth quarter. The government has provided 4 trillion yuan in stimulus spending and encouraged banks to lend a record 9.59 trillion yuan last year, trying to bridge the gap until demand for exports rebounds or domestic consumption takes off.
[...]
Instead of concentrating on their core businesses, giant state-owned enterprises, or SOEs, have bet on real estate, according to Zhang Xin, a former Goldman Sachs Group Inc. analyst who’s chief executive officer of Soho China Ltd., the biggest property developer in Beijing’s central business district. “All the SOEs are bidding the prices up to the sky,” Zhang told China International Business, a magazine backed by China’s Ministry of Commerce, in December. That’s despite office vacancies in China’s capital being at record highs, according to Boston-based commercial real estate company Colliers International.
[...]
Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained in May 2009 that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that was in such good condition it had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported.
[...]
Still, even Mobius says investors have to be wary. He got rid of an investment in a Chinese food company after discovering that it was using funds to buy apartments instead of to process soybeans.

Overcapacity in China

Yet another great report about China's economic crash ahead. The bit that worry me a lot is that more than 60 percent of investors surveyed by Bloomberg on Jan. 19 said they viewed China as a bubble. As a contrarian play, it looks like I might be wrong, since I'm agreeing with 60% of the investors.

Feb. 12 (Bloomberg) -- Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.

“I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009.

Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($965 million) 74- story China World Tower 3.

Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.

“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.” [...]

A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.

More than 60 percent of investors surveyed by Bloomberg on Jan. 19 said they viewed China as a bubble, and three in 10 said it posed the greatest downside risk. The quarterly poll interviewed a random sample of 873 Bloomberg subscribers and had a margin of error of 3.3 percentage points.

Digesting the debt from a popped property bubble may slash bank lending and drag growth lower for years in an economy that Nomura Holdings Inc., Japan’s biggest brokerage, says will provide more than a third of world growth in 2010.

The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, ranked China’s top university by the Times newspaper in London. [...]

“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land -- not even desirable plots of land -- in Beijing to astronomical rates,” Chovanec said. “At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it’s just a case of when you recognize the losses -- or don’t.”

China’s lending surged to 1.39 trillion yuan in January, more than in the previous three months combined. Property prices in 70 cities climbed 9.5 percent from a year earlier, the most in 21 months.[...]

Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.

The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas -- the 160-story Dubai skyscraper that’s the world’s tallest.

[...]  CB Richard Ellis doesn’t count empty office buildings bought by banks and insurance companies when calculating vacancy rates, since some of the space is for the owners’ use. The Los Angeles-based company said in a report that vacancy rates are starting to fall and rents to rise for the best office buildings as China’s fast economic growth buoys demand.

[...] “In many cases when you look at these buildings and say, that’s never going to be fully occupied, somehow 12 to 18 months later the building is full,” said Chris Brooke, CB Richard Ellis’s Beijing-based president and chief executive officer for Asia.

Overcapacity may be looming in manufacturing as well. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product. Excess steel capacity may have reached about 132 million tons in 2009, more than the 87.5 million tons from Japan, the world’s second-biggest producer. The Beijing- based EU Chamber of Commerce report said a “looming deluge” of extra cement capacity is being built.

[...] “A lot of people will lose a lot of money, but the banks will probably not go down like in the 1990s,” Xie said in a phone interview. “Of course there will be a lot of bad debts. There will be a lot of mortgages gone bad I think.”

[...] “China is the only place in the world that despite having more empty buildings than the rest of the world has yet to reflect those valuations on their balance sheet,” Rodman said.

[...] The supply of office buildings will continue to grow. Jones Lang LaSalle Inc., a Chicago-based real-estate company, estimates that about 1.2 million square meters (12.9 million square feet) of office space in Beijing will come on line this year, adding to the total stock of 9.2 million square meters.

The city government is driving growth regardless of the market. [...] Across town, the district government is seeking to double the size of the city’s Central Business District, which already has the highest vacancy rate ever recorded in Beijing. It was 35 percent at the end of 2009, according to Jones Lang LaSalle.

AlJazeera report about this 1-million residents city completely empty (fast forward to about 1min20):

The world's largest shopping mall, in Guangzhou, China built in 2005 that now sits almost entirely empty (IPTV link, requires you to be located in the US).

On Dubai owned Dubai World default

First, a note to those who are reading on the media that "no one saw it coming": It was so obvious it was coming... It had actually already happened, in my opinion! See for yourself below:

• 2009-02-06 Dubai on the brink of collapse - The Skyscraper Curse [update]
• 2009-02-24 Dubai receives a $10 billion bail out by the UAE Central Bank
• 2009-08-16 Dubai collapses to uncharted territory
• 2009-09-14 Dubai's Wealth Fund collapses

Second, a note to all those that think that "markets overreacted" and that "Dubai World's liabilities are so small": the problem is not in my opinion that the liabilities are small or not. It's rather that it just confirms to those who thought the worst is over that they couldn't be further from the truth. It's now time for the sovereigns to default. That's what is scary and dangerous, not the tiny $60 billion of liabilities that Dubai World is defaulting on.

Below, some interesting quotes:

Nov. 26 (Bloomberg) -- Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.

The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Its debt includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. Dubai credit-default swaps climbed 90 basis points to 530 after yesterday increasing the most since they began trading in January, CMA Datavision prices showed.
[...]
Dubai, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom to transform the economy into a regional tourism and financial hub. The emirate suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

Moody’s Investors Service and Standard & Poor’s cut the ratings on Dubai state companies yesterday, saying they may consider Dubai World’s plan to delay debt payments a default.

My Comment: as usual, ratings agencies and analysts didn't see it come and react after the fact.

Gulf region default swaps jumped, with contracts linked to Bahrain adding 29 basis points today to 223.5, the biggest increase since Feb. 18. Contracts linked to Abu Dhabi added the most since February yesterday, climbing 36 basis points to 136.5 and were another 23 basis points higher at 159.5 today, according to London-based CMA. Qatar default swaps rose 13 basis points to 117, adding to yesterday’s 11 basis-point increase.
[...]
Dubai World had $59.3 billion in liabilities and $99.6 billion in total assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. Dubai owes $4.3 billion next month and $4.9 billion in the first quarter of 2010 through government and corporate debt, Deutsche Bank AG data show.
[...]
“Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject on it in order to see the enterprise survive,” said Luis Costa, emerging-market debt strategist at Commerzbank AG in London. “Events like this are a perfect storm.”

Dubai credit-default swaps now rank as the fifth most expensive worldwide, exceeding Iceland’s and Latvia’s.
[...]
Dubai World will ask creditors for a “standstill” agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due Dec. 14 from Nakheel, Dubai’s Department of Finance said in an e-mailed statement yesterday.

Dubai World’s more than 70 creditors face the prospect of writedowns on as much as $60 billion of debt if they haven’t unloaded their holdings and the state-owned company fails to win additional support from Abu Dhabi.

The biggest creditors are Abu Dhabi Commercial Bank and Emirate NBD PJSC. Other lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation. Barclays slumped as much as 6.9 percent, the biggest intraday loss in a month, while RBS sank as much as 8.3 percent. Lloyds and Credit Suisse dropped more than 3 percent.
[...]
The debt “restructuring may be considered a default under our default criteria,” S&P said in a statement.

My Comment: oh really??

(Times Online) The Government of Dubai said today that it will not stand behind its wholly-owned subsidiary Dubai World, prompting fears that the company’s creditors could lose billions of dollars.

Today's comment, from Abdulrahman al-Saleh, the director general of Dubai’s Department of Finance, effectively confirms that [the] country does not have enough money to repay Dubai World’s $60 billion of liabilities. Deloitte, the accountancy firm, has been called in to restructure the giant business.

Dubai collapses to uncharted territory

About six months after my initial post about the Dubai (2009-02-06 Dubai on the brink of collapse - The Skyscraper Curse - oddly enough, reaching in the top 3 more read posts of my blog), I thought it would be interesting to provide a follow up on the situation in the middle east, and more specifically, the bubble-deserts (Dubai and Qatar mainly).

(WSJ - 4th of August 2009) DUBAI -- Home values in Dubai have fallen by about half from their peak late last year in the wake of the global real-estate slowdown, a widely watched index of Dubai property prices showed Monday. [...]

[The report is mainly bullish, still trying to revive the idea that buying homes in a desert make you rich, but there's one bearish statement in the whole report:]

Saud Masud, a real-estate analyst at UBS, said a decelerating price fall doesn't necessarily point to market recovery. "The underlying trends are not supportive of a recovery in the market anytime soon," he said.

(AFP - 16th of August 2009) DUBAI — Just one year ago, property prices in Dubai were surging to record peaks undeterred by a real estate slump in major markets, but they have since gone into free fall and have yet to find the bottom.

Market watchers in the former Gulf boomtown differ slightly on the magnitude of the decline so far, but all seem to agree that the prices of Dubai property, which was selling unchecked over the past three years, should drop further.

"The decline in prices still has a little bit to go before bottoming out," said Sana Kapadia, vice president of equity research at the regional investment bank EFG-Hermes. "We expect a total drop in Dubai of between 50 to 60 percent from peak prices in 2008. We have seen a cumulative decline of 45 to 50 percent so far in Dubai," she told AFP.
[...]
It would be a terrible mistake to believe that we are out of the woods," said Jeremy Mayhew-Sanders, head of investments and development at Sherwoods Property, referring to such few recovery signs.

He said that some prices had improved due to an artificial shortage of units on offer in some areas, as low prices had pushed some owners to pull their units from the market.
But a shortage of new housing units -- a major catalyst for the surge in prices and rents over the past few years -- should be the least worry for buyers as thousands of new units are being delivered this year, with more scheduled to be ready next year.
"Many under-construction projects are nearing delivery time, bringing more units into the market... There is a lot of supply that has to be absorbed," Kapadia said.
Landmark Properties projects some 22,700 residential units to be delivered by the end of this year, with 40,400 others to be delivered in 2010, although many projects have reportedly been put on hold for lack of cash and interest.

And the same story applies to Qatar. These bubble economies are bound to collapse, there is no other ending possible. And when depopulation becomes a major issue, you know the end is near...

Qatar is facing a significant oversupply of real estate in 2012 as its population falls, leaving swathes of property development empty, according to two new reports.
[...]
This could lead to a 'significant overhang' of real estate, they claim. 'While expatriates constitute 90% of the workforce, which is similar to Dubai, a much bigger portion of those are blue collar workers who are more likely to leave in 2012,' the bank report said.

The company is also warning about de-population. Al Mansoory said that the latest published figures show that it has already fallen from 1.9 million to 1.6 million. [That's 15-20% !]

Finally, looks like the new way of making profits of real estate in Dubai is legal claims:

The collapse of Dubai’s once-booming construction industry has created a backlog of legal claims totalling almost £3 billion.

Disputes over unfinished contracts and outstanding payments are stacking up in the emirate’s arbitration court, according to Building magazine.

This year, more than 180 claims have been filed, mostly by international contractors. British firms are estimated to be owed at least £400m on contracts in the United Arab Emirates, many of which relate to work for state-backed investment and development firms.

Atkins, the £700m support-services giant, is among the firms to have publicly admitted being owed money in Dubai. Forensic accountants and legal experts are starting to flood in. Price Waterhouse Coopers has moved a team of 20 investigators to the emirate in recent months.

Of course, even if legal claims and fees will add to GDP, they are destroying value, not creating wealth in the general sense for the population.

Dubai on the brink of collapse - The Skyscraper Curse [update]

In just a matter of 48 hours, I ran into a couple of articles describing the fall of the Dubai bubble economy, hugely driven by speculation in real estate (and propelled by easy borrowing and lax lending standard). I went to Dubai just for a week-end in January 2006 and I could tell that the fall will come and that it would hit hard.

Here are some quotes from a the Times Online and Bloomberg - and also very interestingly, Bloomberg made me discover an economic indicator that I had never heard about: the Skyscraper Curse. After digging, it appears that not only is this indicator is not new at all, but that it is quite reliable, for various reasons that will follow.

Let's first take a look at the Times Online article [emphasis mine]:

For many expatriate workers in Dubai it was the ultimate symbol of their tax-free wealth: a luxurious car that few could have afforded on the money they earned at home. Now, faced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.

Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.

Some had used-to-the-limit credit cards in the glove box. Others had notes of apology attached to the windscreen.

When the market collapsed and the emirate’s once-booming economy started to slow down, many expatriates were left owning several homes and unable to pay the mortgages without credit.

“There were a lot of people living the high life, investing in real estate and a lifestyle they couldn’t afford,” one senior banker said.

Under Sharia, which prevails in Dubai, the punishment for defaulting on a debt is severe. Bouncing a check, for example, is punishable with jail. Those who flee the emirate are known as skips.

The abandoned cars underscore a worrying trend. Five years ago the Emir, Sheikh Mohammed bin Rashid Al Maktoum, embarked on an ambitious plan to transform Dubai into a hub for business and tourism. A building boom fuelled double-digit growth, with thousands of Westerners arriving every day, eager to cash in on the emirate’s promise of easy living and wealth.

Many Westerners invested in Dubai’s skyrocketing real estate market, buying and reselling homes before building was even complete. But, as the recession took effect, property and financial companies made thousands of workers redundant and banks tightened lending. Construction companies have delayed or cancelled projects and tourism is slowing.

There are increasing signs that the foreigners who once flocked to Dubai are leaving. “There is no way of tracking actual numbers, but the anecdotal evidence is overwhelming. Dubai is emptying out,” said a Western diplomat.
[...]
Most of the emirate’s banks are not affiliated with British financial institutions, so those who flee do not have to worry about creditors. Their abandoned cars are eventually sold off by the banks at weekly auctions. Those recently advertised include BMWs, Porsches and Mercedes.
[...]
Police have issued warrants against owners of the deserted cars. Those who return risk arrest at the airport.

3.62 million expatriates in Dubai
864,000 nationals
8% population decline predicted this year, as expatriates leave
1,500 visas cancelled every day in Dubai
62% of homes occupied by expatriates
60% fall in property values predicted
50% slump in the price of luxury apartments on Palm Jumeirah
25% reduction in luxury spending among UAE expatriates
Sources: arabbusiness.com ; Times database

More useful information in this Bloomberg report:

Feb. 6 (Bloomberg) -- As construction cranes littering Dubai’s skyline go idle, it’s time to revisit that ever intriguing economic indicator: the Skyscraper Curse.

As this columnist has pointed out periodically, there’s an uncanny, if unscientific, correlation between financial crises and efforts to build the world’s tallest building. Look no further than Kuala Lumpur in 1997, Chicago in 1974, New York in 1930 and in biblical times with the Tower of Babel.

The human propensity for architectural overreach has been a surprisingly reliable omen. It’s not a stretch to think of such projects as visual punctuation marks. A giant billboard made of steel, glass, concrete and money. A common thread between skyscrapers and economic disasters has to be easy credit, which fuels irrational growth, valuations, and hubris.

The gleaming Burj Dubai, as fate would have it, recently overtook Taipei 101 as the tallest building at 818 meters (2,684 feet). Right on cue, Dubai’s economy is looking unthinkably shaky.

A year ago, with oil prices heading toward $200 a barrel, few dared question property prices in the United Arab Emirates. Now, there is evidence they “fell off a cliff” as banks reduced lending and speculators withdrew amid the worsening global crisis, Mai Attia, a Morgan Stanley analyst based in the sheikdom, said in a Jan. 30 report.

Strong language, and yet it’s a reminder of how far and wide a credit crisis that began in the U.S. is traveling. China, that other supposed juggernaut, is looking shaky, too. Japan is back in recession, while Singapore seems to have fallen off the same cliff as the U.A.E.’s asset markets.

Thanks to deteriorating economic conditions, job cuts and the unavailability of mortgages, Dubai property prices are down 25 percent from the market peak in September, Morgan Stanley said.

The implications of that will travel the globe. Take the Philippines, where money sent home from overseas workers in booming economies such as Dubai’s are taking a hit. Remittances make up about 10 percent of the Philippine economy, fueling purchases of homes and cars in a nation where private consumption accounts for about two-thirds of gross domestic product. That support is now questionable.

It’s easy now to look back and say we should have seen this coming. Some did, of course. After a Dubai visit in late 2006, Claudia Zeisberger [...] told me: “All the building going on made me feel like I was experiencing the last days of ancient Rome.”
[...]
Few seriously doubt Dubai is a development miracle. Yet it’s fair to wonder if it’s the epicenter of an Arabian asset bubble tied largely to surging energy prices. With crude oil now around $35, fortunes are shifting. Construction booms should have been a harbinger of trouble.

Where else should we be looking? Well, China. Of the 10 tallest high-rise buildings listed by Darmstadt, Germany-based Emporis Buildings, five are in the third-biggest economy and one is in its special administrative region, Hong Kong. Of the 20 tallest, nine are in mainland China or Hong Kong.

Hong Kong is already in recession and China may be heading that way. For a nation at China’s level of development, growth below 6 percent is arguably a recession and anything below 5 percent is crisis territory.

What skyscrapers say about China is investor overreach. The conventional wisdom was that China could grow 10 percent indefinitely. That view meant the numerous mini-Manhattans popping up around the nation were a logical extension of its potential. Or was it merely a textbook case of an easy-credit- driven boom going bust?

Russia may avoid a meltdown, meanwhile, thanks to billionaire Chalva Tchigirinski. In November, Tchigirinski halted construction on the Russia Tower, which would have been Europe’s tallest. Ditto for the U.S., where Donald Trump reined in his ambitions to erect America’s tallest building. His Trump International Hotel is the world’s 11th-tallest high rise.

The Skyscraper Curse may be nothing more than a whimsical exercise to entertain, not inform. Then again, it’s proving to have some pretty solid foundations as an economic barometer.

This report was by William Pesek who has also written on Bloomberg about the Skyscraper Curse before in December 2006 and in November 2007 which share a common base but are still worth having a read.

[Update] An interesting video on YouTube from a German TV report about the collapse of the real estate. I am wondering if I should hope for this guy who still wants to go on with his "Michael Schumacher" luxury tower to really make it to the construction or not, because if he does build it without selling them beforehand, I am 99% sure he's going to be bankrupt before the construction is over.

[Update 20110208] For an in depth analysis and discussion about the Skyscraper Curve, please read this post.