Quotes of the Day

The dumbest investment I ever made was to buy an apartment in Manhattan in the late '80s. Prices were soaring and it seemed like an effortless way to get rich, so my brother and I pooled our money and bought a place for $327,000. Within 18 months, the market had tanked and the apartment's value had plunged by a third. By then, our tenant—who turned out to be a coke-snorting stripper—had stopped paying rent. When I threatened to change the locks, she whacked me on the head with her handbag and warned: "I know people in this town, and you're going to end up at the bottom of the East River." She moved out the next day, but the investment continued to be a dud: after eight miserable years, we sold out for a loss of $17,000.

But a few months ago, with memories of this debacle fading, my brother and I began to discuss buying property together again—this time, in Shanghai. China's economy is growing at about 9.5% a year and Shanghai is the epicenter of the boom, yet apartments there still cost far less than in Hong Kong, Tokyo or New York. That gap will close, says Marc Faber, an emerging-markets expert who writes a newsletter called the Gloom, Boom and Doom Report. "Eventually," he predicts, "Shanghai property prices will be higher than prices in New York."

We soon settled upon a strategy: find a luxury apartment in one of the best downtown areas, hire a property firm like Colliers International or Jones Lang LaSalle to manage it, then lease it to expats. (Locals, I was told, hate to rent.) "Go for a prime location in the city center," advised Wayne Zane, an analyst at Colliers. "In a downturn, it will be less affected." So, a few weeks ago, I began touring apartments in buildings with names like Baroque Palace and Sea of Clouds Garden. The target zone: three downtown districts—Xuhui, Jingan and Luwan—that all seem certain to remain prime locations no matter how the city mutates.

It soon became clear, though, that everyone else had got there first; foreign investors, mostly from Hong Kong, Taiwan and Singapore, have driven up prices at an astonishing rate. One promising complex was the Summit: it's well located, solidly built by a reputable foreign developer (a key consideration in a city where many buildings fall apart), and has all the trappings an expat might want, from indoor pool to cigar room. The trouble was, the asking price for a large three-bedroom had doubled in two years to about $800,000—perhaps a third of what it would cost in Hong Kong, but hardly a steal. In some luxury buildings, prices had surged by 45% in six months, fueled by low mortgage rates, expectations among foreign buyers that China's currency will gain against the U.S. dollar and by widespread fear of missing out on this historic bonanza.

Shanghai fever is especially acute in the trendy area of Xintiandi, where the Lakeville apartments are probably China's most coveted properties. The next batch of Lakeville units isn't expected to be finished until mid-2006, but nearly 1,000 people have already registered to be notified as soon as they go on sale. Shu Yin Lee, who runs a property syndicate that made millions by buying five Lakeville penthouses while they were under construction, says he gets calls every day from agents with clients eager to buy them. But even after doubling his money, he's holding on, arguing that superluxury flats will only get more expensive as Shanghai becomes "a city where seriously rich people feel comfortable."

Still, at today's prices, Lee isn't buying. Nor am I. After all, having missed the joyride so far, it's hard not to worry that the headiest gains have already been made. The most vocal doomsayer is Morgan Stanley economist Andy Xie, who has warned repeatedly—to the great misfortune of those who've heeded him—about an ominous oversupply of apartments and the government's halfhearted efforts to rein in speculation. For me, there's a particular terror of repeating my New York mistake: joining the herd moments before it runs off the cliff. But with Chinese incomes surging and well-paid expats flocking to Shanghai, I have little doubt that luxury apartments in prime locations are a great bet if you hold on to them long enough. As Faber says, "You may overpay on a short-term basis, but real estate in China makes sense in the long term." Of course, the same was true of New York. If we'd held on to that dud apartment for a few more years, it would now be worth about three times what we paid for it. In retrospect, buying it wasn't nearly as dumb as selling it.

• William Green
• Should you buy Shanghai property as the ultimate long-term bet on China's boom?