Unmoved by trade war escalations, China’s commercial real estate market outperforms competitors

Asset turnover, the Greater Bay Area and Beijing’s economic stimulus have all helped China’s real estate market defy global trends and the broad slowdown in its own economy

Nicholas Spiro

Published: 2:00pm, 20 May 2019

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In the past month, China’s fragile economy and financial markets have taken a severe knock. The trade war has unexpectedly intensified, throwing the acuteness of the commercial and economic tensions between Washington and Beijing into sharp relief. Mainland stocks have suffered four weeks of losses, while the yuan is edging closer to its record low versus the dollar.

More worryingly, China’s economy, which appeared to be stabilising earlier this year, has continued to lose momentum. Last month, retail sales grew at their slowest pace in 16 years, while industrial production expanded at its weakest rate since 2009.

Yet in China’s commercial real estate market, investment transaction volumes are surging.

According to a report published this month by property adviser Jones Lang LaSalle investment volumes in the first quarter of this year rose to a record high of US$17 billion. This was the main driver behind the strong performance of the Asia-Pacific region as a whole, where commercial property transactions increased 14 per cent year on year, to an all-time high of US$45 billion.

The surge in real estate investment in China comes at a time when the world’s other big markets are experiencing a decline in transaction volumes. Data from Jones Lang LaSalle shows that commercial real estate investment globally fell 8 per cent in the first quarter of this year to US$156 billion, dragged down by a 22 per cent drop in transaction volumes in Europe and an 8 per cent fall in the Americas.

The decrease in global property deals this year is partly due to a 17 per cent decline in cross-border capital flows, the main driver of commercial real estate investment over the past several years.

In China, however, foreign investment in the property sector is booming. Jones Lang LaSalle notes that Shanghai was the world’s second-most-actively-traded investment market after Tokyo in the first quarter, attracting US$6.3 billion of investment (slightly more than both New York and London) and emerging as the second-largest recipient of cross-border capital after London.

If one excludes development sites – which accounted for the bulk of transactions in Shanghai – Beijing was the most liquid real estate investment market in the Asia-Pacific region, overtaking Hong Kong and Tokyo, according to a report by Real Capital Analytics, a property research firm, published this month.

Singapore is leading Asian real estate investors deeper into Europe

In Shanghai, investment volumes surged 66 per cent year on year in the first quarter, boosted by six large transactions, with the average deal size ranging between US$360 million and US$580 million, data from Savills, another real estate adviser, reveals.

The largest deal was the acquisition in February by Greenland Group, Shanghai’s largest developer, of a 50 per cent stake in a prestigious mixed-use development site in the city’s South Bund area from China Minsheng Investment Group for nearly US$1.8 billion following the latter’s default on a 3 billion yuan (US$430 million) bond in January. According to Mingtiandi, an Asian real estate news provider, CMIG acquired the site at an auction in 2014 for a record-breaking US$3.6 billion.

The huge price discount reflects a broader trend in China’s real estate investment market: the forced disposal of assets by local developers that were hit hard by the government’s deleveraging campaign.

This is one of the reasons why cash-rich domestic and foreign buyers are pouring money into mainland property. In a report published this month, Savills notes that “under the tight credit environment, some developers [have been] forced to invite partners or sell big-scale development sites to ease credit stress since [these] sites require a large capital commitment”. This is contributing to a “softening of [capitalisation] rates”, or the yield generated by a property, making purchases more attractive.

The Greater Bay Area can play a key role in the new investing age

Another key driver of China’s property investment market is the “Greater Bay Area” initiative which aims to connect the country’s southern coastal cities with Hong Kong and Macau, creating a global innovation hub. Data from Jones Lang LaSalle reveals that Shenzen was the world’s ninth-most-liquid real estate market in the first quarter of this year (up from 68th only a year ago), attracting US$3.4 billion of investment, almost a third of it from overseas buyers.

While Hong Kong, Shenzen and Guangzhou will attract the lion’s share of investment in the bay area scheme’s property market, second- and third-tier cities are expected to gain from the spillover effects of increased economic activity and development.

Although Jones Lang LaSalle expects local developers to dominate the residential market, foreign investors are already searching for assets – in particular mixed-use schemes – that are set to benefit from stronger growth. As the adviser notes, “the reality is that, beyond Guangzhou and Shenzen, land is cheaper and there is more scope for growth”.

Investor sentiment in China’s commercial property market is also being buoyed by the government’s shift towards stimulative policies, with the revival of the trade war increasing the pressure on Beijing to provide more forceful stimulus. Unlike in Europe and America, property developers and investors in China benefit from a much firmer political commitment to shore up the economy should growth falter.

While the world’s second-largest economy continues to be a major source of concern in financial markets, China’s commercial real estate investment market is outperforming its global peers.

Nicholas Spiro is a partner at Lauressa Advisory

This article appeared in the South China Morning Post print edition as: Boom amid the tensions

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