How do Shanghai and Beijing defy China’s property slowdown?

Overseas investors’ surging investment in commercial properties in China’s top cities has helped Shanghai and Beijing defy the credit tightening and market slump to sustain their high transaction volumes this year, a trend that is expected to extend into 2019, according to property consultants.

Their share of Shanghai’s total 105 billion yuan (US$15.2 billion) in commercial property deals this year through December 10 had leapt to 61 per cent, up from 24 per cent in 2017, said Cushman & Wakefield. The city closed deals worth a total of 120 billion yuan in 2017.

In Beijing, offshore investors took a 30 per cent share of the total transactions, up from a meagre 2.2 per cent last year, raising this year’s volume by nearly 36 per cent on the year to 56 billion yuan, a record level for the city.

Both cities, traditionally favoured by foreign players, account for about half of these investors’ total commercial property investments in China.

“The 61 per cent (share from overseas investors) is critically important as it holds up Shanghai’s 2018 investment market despite the tight credit conditions and the downturn of the broader property market,” said Eric Lu, executive director of capital markets at Cushman & Wakefield.

“We see this as part of global investors’ overall pivot to strengthen their asset allocation in China, not only in real estate but other financial assets such as stocks. They have raised huge volume of money through China and Asia-focused funds and the quotas are far from being used up. Therefore, we’d see continual interest from overseas investors in 2019,” Lu said.

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For instance, the property investment arm of German insurer Allianz said it wanted to increase its exposure in China to account for 50 per cent of its Asia portfolio. It closed several deals this year, with buying a 50 per cent stake in a portfolio of logistics assets in five Chinese cities as the latest.

Blackstone Group, after raising US$9.4 billion for two new Asia-focused funds in June, recently bought a Shanghai commercial complex for $1.25 billion, on top of two earlier deals in Hong Kong and Sydney.

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Gordon Liu, Cushman & Wakefield’s North China head of capital market, said overseas players were able to gain an upper hand this year as domestic Chinese investors’ hands were tied by Beijing’s financial deleveraging campaign. Their increased appetite was also prompted by the depreciation of the Chinese currency in the past year, which made yuan-denominated assets cheaper.

For next year, Lu expected Shanghai’s transaction volume to beat the 100 billion yuan level, with foreign investment continuing to be a driving force. More assets could also be available as Chinese investors who bought them at high prices in the last upward cycle would be under pressure to sell.

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Grant Ji, head of CBRE North China’s capital markets said while overseas investors’ interest would be unchanged next year, the volume of deals completed would depend on the extent of competition from domestic players.

“If there is substantial [credit] easing to boost liquidity of funds in the market and financial positions of developers, they may pick up purchasing in the commercial market again,” he said.

“But if the condition continues as what it is now, overseas investors will still have an edge.”