Based on data from Jones Lang LaSalle new report released today titled China50: Fifty Real Estate Markets that Matter, China's commercial office and retail sectors are about to add a biblical amount of commercial product to their inventory to meet the phenomenal speed of economic growth of their people over the next eight years. Jones Lang LaSalle's China50 report is an in-depth study of future commercial real estate opportunities in China.
KK Fung, managing director for Jones Lang LaSalle Greater China informs World Property Channel, "The new China50 are being transformed at an unprecedented rate by the scale of building and by the progress of economic development. They are the cities that we believe will be hitting the headlines over the next decade and that will provide opportunities beyond the familiar Tier I cities."
Michael Klibaner, head of research for Jones Lang LaSalle China as commented, "These 50 cities combined are expected to account for 12% of overall global economic growth over the next decade and China50 contains all of the world's ten fastest growing large cities, led by Chongqing, Tianjin and Chengdu. These numbers are a clear signal that China50 is one of the world's most exciting real estate opportunities."
The development of over 100 million sq. meters or over 1 billion sq. feet (1 sq. meter = 10.76 sq. ft.) of commercial space over the next decade is bringing much needed high-quality stock to these 50 cities. As developers move deeper into China50, it is also helping to support the expansion of domestic and international corporates, retailers and hotel operators across the China50, into Tier 3 cities as they tap into favorable demographics and seek 'first mover' advantage.
"As the volume of tradable property assets increases and transparency improves, institutional investor interest in commercial real estate in the China50 will increase. Their focus will be on the retail sector, which provides the largest real estate opportunity, driven by strong growth in China50's middle class population, which is expected to double to over 125 million by the middle of the decade." noted Mr. Fung.
Significant opportunities also exist in the logistics sector where there is a severe under-provision of international grade stock; China's total modern logistics stock is barely equally to that of Boston in the United States. Prospects for logistics will be further boosted by improving transport infrastructure, retail growth and a shift inland of China's manufacturing base.
KK Fung concluded, "The China50 offers a compelling long-term growth story, but the road to maturity is unlikely to be smooth and fears of excessive risk may lead to some caution in the property market over the short to medium term. They will not be immune from volatilities in the global economy, but importantly, some China50 cities, such as Chongqing, Wuhan and Xi'an may prove to be more resilient than most, underpinned by the structural growth of China's domestic economy."
Key highlights of JLL's China50 Report include:
Jones Lang LaSalle highlights 50 secondary and tertiary cities across mainland China that offers substantial commercial real estate opportunities. The China50 are being transformed at an unprecedented rate by the scale of building and by the progress of economic development. They are the cities that, we believe, will be hitting the headlines over the next decade.
The China50 represents a continental-sized market of global scale. It is an economy of US$2.9 trillion, comparable to Germany. If it were a single entity, it would rank as the world's fifth largest economy. Its cities are growing fast, outpacing the rest of China. The China50 will account for 12% of all global growth over the next decade.
The pace of commercial real estate activity is remarkable. Over 80 million sq m of retail and nearly 30 million sq m of Grade A offices will be built in the China50's main cities over the next decade as they grow and modernize. This will bring much needed high-quality stock to the market.
A city hierarchy is taking shape. Since our last report in 2009, nine cities have separated themselves from the pack. We are calling them Tier 1.5 cities, and they comprise Chengdu, Chongqing, Dalian, Hangzhou, Nanjing, Shenyang, Suzhou, Tianjin and Wuhan. These cities are transitioning to maturity and are riding the wave of massive infrastructure and economic development.
Chengdu has emerged as the premier China50 real estate market; Chongqing, Shenyang and Tianjin have the strongest momentum; Wuhan and Xi'an offer good upside potential across multiple sectors.
The balance of growth has shifted from coastal to inland and northeast cities, highlighted not only by the impressive performances of Chengdu, Chongqing and Shenyang, but also by the evolution of cities in central China, such as Changsha, Zhengzhou and Hefei, into Tier 2 status.
Some coastal cities, particularly in the Pearl River Delta, have temporarily lost ground as they go through a restructuring process. But momentum will return as they move up the value chain.
The retail sector will provide the largest real estate opportunity in the China50, on the back of strong growth in the middle classes. International retailers are moving deep into the China50 to tap into favorable demographics. They are expanding rapidly into Tier 3 cities such as Harbin, Kunming and Guiyang.
Significant real estate opportunities exist in the logistics sector, where there is a severe under-provision of international grade stock - China's total Grade A stock is comparable only to that of Boston in the USA. Long-term prospects are boosted by improving transport infrastructure, retail growth and a shift inland of manufacturing.
Office market activity within the China50 will further concentrate into Tier 1.5 cities, where stock quality is improving and demand from domestic corporations will underpin growth. Chengdu will be the leading office market, while those of Chongqing, Tianjin, Wuhan and Xi'an are expected to grow in status.
Business park space is expected to expand robustly on the back of demand from new high-value priority industries that are aligned with the 12th Five-Year Plan, such as new IT, biotechnology and clean energy. Chongqing, Wuhan, Xi'an and Shenyang offer the best prospects for demand growth.
For international hotel operators, new opportunities are now emerging in Tier 3 cities, but operators will need to be more flexible and adaptive in order to compete effectively in these untested markets.
As volumes of tradable assets increase across the China50, institutional investor interest in commercial real estate will increase, but it may ebb and flow with risk appetite and liquidity. Their focus will be on the retail and logistics sectors that capture the dynamics of rapidly-growing consumer markets.
The China50 will continue to offer a compelling long-term growth story, but fears of excessive risk may lead to some caution in the property market over the short to medium term. They will not be immune from volatilities in the global economy, but importantly, its inland cities may prove to be more resilient than most, underpinned by the structural growth of China's domestic economy.