Concrete Analysis | Is there a fundamental shift in Shanghai investment market?

2014 could be described as a year of change and adjustment, both at the national and the level of Shanghai’s own economy and real estate markets. At the highest level, the central government launched a series of measures aimed at stabilising the residential sales market and ended the year with a movement towards monetary easing, with the aim of preventing further deceleration of the economy.

At the same time, we also witnessed a decline in investment volume, which was not unexpected following the record high of 2013. We also saw the beginning of a decompression in the office market cap rate as the attention of potential investors shifted increasingly towards other global core office markets.

This shift in attention was further underscored by a change in the direction of domestic capital flows, as the momentum of Chinese outbound investment in international markets gathered pace. While these phenomena only represented an intensification of existing trends, for some investors it has raised a question: Does the intensification of these trends portend a fundamental shift in the Shanghai investment market?

Shanghai is the single largest focal point for overseas investment in real estate in China and a place where many overseas foreign investors have engaged in opportunistic investment. This is evident from the five office deals by foreign funds transacted in the city last year.

Most of the five transactions, which occurred within the year, involved well-located grade B offices that offered good rent reversion prospects while also providing opportunity for value addition via upgrading and refurbishment.

However, last year we saw a drop in investment by foreign funds, despite indications that cap rates were beginning to rise. This has led some to wonder, should this slackening in overseas interest be taken as an indication that the market has entered a period of decline?