Concrete AnalysisOpportunity beckons for investors in China as economic shift gains pace

China is arguably the epicentre of mass urbanisation, experiencing relentless growth in its middle classes, and symbolising the shift in economic power from the West to the East. It has transformed over the past two decades into the world's largest exporter, characterised by major industrialisation and mass urbanisation.

As the economy progresses along the value chain, from production to consumer and service industries, immense opportunities will open up for real estate investors. However, the transition will not be an easy one and the current backdrop for the overseas investor remains one of severe economic imbalances, mounting environmental concerns, rising economic inequality and an ageing population.

According to Real Capital Analytics, nearly US$250 billion of capital has been invested into China by overseas sources over the past decade. Development sites accounted for the majority of this investment while office and retail investment accounted for less than 20 per cent. About 70 per cent of the overall capital comes from Hong Kong with the rest of the world, excluding Singapore, representing less than 16 per cent of inflows over the decade, highlighting the resistance of China to foreign ownership of its assets.

For US and European investors, joint ventures have tended to be the preferred route. Chinese private property companies have been turning to foreign institutional investors for finance and operational expertise for some time. However, overseas investors need to have a high level of confidence in their partner, so choosing a partner with integrity is critical.

Market transparency is clearly a major issue for them, and China's tier-1 cities are ranked as semi-transparent by property advisors JLL. That said, future improvements to the regulatory and legal environment are anticipated, given plans to introduce a national property registry. Liquidity, or average annual investment transactions, looks reasonable compared with other countries, but the cross-border share is currently low.

Other issues include high cyclical volatility and relatively weak income security. Short lease terms combine with vacancy risk, especially in emerging office markets characterised by rapid development. Locational depreciation is also a risk outside core business districts. The big issue, however, is land rights and the uncertainty of what might happen when these expire. This requires a major leap of faith for institutional overseas investors that are used to acquiring freehold.