Analysing the risk and return profile of Chinese residential property markets

This research examines the performance and diversification benefits of five leading Chinese residential property markets. On six years of reliable quarterly data, the low income returns were relatively stable compared to the considerable variations overtime and across markets in capital growth. The marked variations between the performance profiles suggested that speculative Chinese residential property markets appeared to operate independently and are influenced by local factors. Based on an efficient frontier model, residential property risk profiles can be lowered considerably with a well diversified residential property portfolio. On the available data, the optimum allocation is a residential portfolio anchored by a Beijing residential property with exposure to all markets. This achieved a 40% improvement in risk adjusted returns to that of a single location residential property portfolio. Similarly, for Chinese high net worth investors, the benefits of diversification, by combining an investor's primary location with an additional residential property in an alternative location, lead to at least a 16% improvement in the risk adjusted returns. For an astute Chinese investor, this diversified portfolio approach provides superior stable long term returns than short term risky speculative residential property investments.