The Most Important Sector in the Universe
August 2, 2022·23 comments·In Brief
Marc Rubinstein has over 25 years experience as an analyst and investor in the financials sector which he distills into a weekly newsletter, Net Interest, which I think is a really great read! Between 2006 and 2016 he was senior analyst and portfolio manager on the Lansdowne Global Financials Fund, a fundamental long/short equity fund focused exclusively on the global financials sector. Prior to that, Marc was an Institutional Investor ranked analyst on the sell-side, most recently at Credit Suisse, where he was a managing director overseeing its European banks team. As well as writing Net Interest, Marc is an active angel investor in fintech. He can be contacted via his newsletter or on Twitter (@MarcRuby).
As with all of our guest contributors, Marc’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.
It’s been described as “the most important sector in the universe” and it’s easy to see why. The Chinese property sector is first and foremost big. The total value of all the homes in China stands at $60 trillion – twice the size of the US residential market and bigger even than the entire US bond market. The Chinese property market is probably the largest asset class globally.
(source: WFE, CEIC, Japan Cabinet Office, Halifax, Goldman Sachs Global Investment Research)
It’s also central to the economy. Real estate investment stood at over 13% of GDP in 2019, of which more than 70% was linked to residential building. Add in the contribution of the construction industry and the share jumps closer to 29%. Yet even this potentially understates the importance of property to the economy: Housing accounts for almost two-thirds of households’ overall assets – compared with around a third in Japan and a quarter in the US – so it has a major bearing on people’s spending decisions. [1]
It’s central to government finances, too. Since changing its constitution to allow land-use rights to be bought and sold under long term leases, the Chinese state has relied on land sales to raise funds to meet its budget. Based on data from the IMF, revenues from land sales accounted for around 39% of local government revenues, equivalent to 7% of GDP, in 2017.
And it’s central to the financial system. Banks rely on real estate and land holdings as the main source of collateral to secure loans. Housing loans account for around a third of banks’ loan books and have grown more quickly than other loan categories.
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