Opinion | Amid a property market crisis, China’s commercial real estate has held up

Opinion | Amid a property market crisis, China’s commercial real estate has held up

Opinion | Amid a property market crisis, China’s commercial real estate has held up

Given such a bleak domestic and external backdrop, the strong performance of China’s commercial real estate investment market is a remarkable feat. According to data from MSCI, transaction volumes last year reached US$37.5 billion, the highest in Asia and slightly more than in Japan, the region’s most popular market.

While a significant portion of investment activity was attributable to distressed sales as vulnerable developers offloaded assets to help shore up their operations and pay off their debts, strong demand for logistics properties and rental apartments – two of the most sought-after commercial property assets globally – contributed to China’s strong performance.

Indeed, among the major cities in Asia, Shanghai was the second most actively traded market behind Tokyo, outperforming Seoul and Sydney, two other top performing commercial property markets in recent years.

People walk along a street in the Koenji area of Tokyo, Japan, in October 2023. Tokyo was the most actively traded commercial real estate market among major cities in Asia last year, with Shanghai second. Photo: Bloomberg

Several factors help explain why China held up so well. First, although global cross-border investment in Asia’s commercial real estate market fell sharply in the past two years, intraregional investment fared better. Hong Kong investors deployed almost as much capital in mainland China last year as they did in 2022 while Singaporean buyers remained active despite spending significantly less than in the past several years.

Second, and more importantly, domestic investors – which account for the bulk of investment activity in China – have played a more prominent role since the pandemic erupted as foreign buyers, especially North American and European investors, retreated. Last year, domestic buyers accounted for over 80 per cent of transactions compared with 60 per cent in 2019, data from MSCI shows.

Domestic transaction volumes, moreover, have not fallen as precipitously as cross-border purchases. Chinese insurance companies have emerged as one of the most important sources of capital in Asian commercial property. Less sensitive to geopolitical risks, domestic institutional investors have taken advantage of the pullback by foreign buyers to acquire logistics assets at more attractive prices due to the wider gap between rental yields and bond yields.
Indeed, MSCI notes that China’s industrial and logistics sector is one of the parts of Asia’s commercial real estate market where prices have adjusted the most, partly due to the slowdown in consumption-driven e-commerce. With the exception of a few other sectors, notably Australian offices, Asian commercial property has been slow to reprice, contributing to the sharp fall in investment activity.


Chinese investors offloading overseas properties

Chinese investors offloading overseas properties

Third, the crisis in China’s housing sector has added fresh impetus to the rental market. It has also served as a catalyst for the institutionalisation of rental housing. While the multifamily sector – apartments in city centres purpose-built for the private rental market, which are professionally managed and leased to a variety of tenants – is a mature and widely traded segment of the property market in the United States, it is in its infancy in China, providing a vast untapped opportunity for investors.

In a report published in December, JLL said China’s rental housing market had “entered the lift-off phase”. This is underpinned by increased barriers to home ownership, greater acceptance of renting among younger adults, and more supportive government policies. Even in Shanghai, the penetration rate of private rental apartments is just 8 per cent, according to CBRE.

Some foreign institutional investors, including LaSalle Investment Management, have established their own brands and operating platforms focused on tier-one cities. Average occupancy rates for projects operating for more than six months are in the mid-90s, underscoring the resilience of the nascent sector. Multifamily has become a popular investment strategy, with transaction volumes in the sector last year exceeding the total for the previous two years, data from CBRE shows.

Fourth, although regulatory risk has contributed to the dramatic decline in Chinese stocks, commercial property has benefited from regulatory reforms that have led to the establishment of a listed real estate investment trust (Reit) market, boosting transparency and liquidity in the industry.
Affordable housing trusts were launched in 2022. The pilot programme has expanded to include traditional forms of real estate such as shopping centres, providing new exit channels for investors and developers.

ESR, Asia’s largest real asset manager, announced in December that it had filed an application with Chinese regulators to list several of its logistics assets in the country on the Shanghai bourse. If successful, it would be the second international firm to list a Reit in China.

To be sure, China’s commercial property investment market has slowed significantly over the past two years. If it were not for distressed sales, the slowdown would be even sharper. Yet the fact that China was still the region’s most actively traded market last year shows that a strong domestic investor base, a sharper repricing of property values and policy support for key sectors can make a difference.

Nicholas Spiro is a partner at Lauressa Advisory

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