Domestic Chinese Institutional Investors Anticipated as Major Source of Capital
According to CBRE's Towards 2020: China Investment Strategy report, commercial property transactions in China will grow to RMB 260 billion ($39 billion USD) by 2020, a 45% increase from 2016.
Underlining the huge investment potential in the country's real estate market, institutional investors, real estate developers and other investors are set to contribute around RMB 1 trillion ($150 billion USD) to new commercial property investment in China over the next three years.
"The prospects for China's commercial real estate (CRE) market remain extremely promising to both institutional investors and developers. Supported by a maturing economy, the ongoing evolution of the corporate sector and a shifting consumption story, China will undoubtedly remain one of the top destinations for global asset allocation," said Alan Li, Managing Director of Capital Markets, CBRE Greater China.
The attractiveness of China's commercial real estate sector complements the diversity of investors now active in this market. In recent years, domestic institutional investors including insurance companies and real estate funds have become more active in the CRE sector due to finite investment alternatives, slower economic growth, historically low interest rates and a favorable policy environment. As a result of this environment, CBRE believes institutional investors will continue to increase their allocation in real estate and emerging as a major source of China's property market investment, accounting for 70% of the overall RMB 1 trillion contribution.
In addition to institutional investors, other sources of capital contribution within China's investment market include real estate developers, who are increasingly shifting focus from development to investment properties, and other cross-border investors.
"Chinese investors are looking more optimistically at the domestic real estate market. Factors including offshore capital control are also bolstering the market, placing international investors in an advantageous position to conduct offshore deals," said Sam Xie, Head of Research, CBRE China. "As a result of increased local and international activity, China has seen a 46% spike in investment turnover in the first half of the year and further cemented its position as one of the world's most active commercial real estate markets."
Beijing and Shanghai are expected to continue seeing a high level of transaction volume and activity, accounting for 60% of total nationwide transaction volume by 2020. Both markets will also continue to challenge other regional cities as legitimate APAC gateway markets. According to CBRE Research, from 2014 to 2016, transaction volume and activity in Shanghai exceeded that in Hong Kong and Singapore, demonstrating the growth potential of China's real estate market.
Investment in China's CRE market also extends to the country's growth cities, with Guangzhou, Shenzhen, Chengdu, Chongqing, Tianjin and Wuhan seen as more attractive markets to investors. Additionally, cities like Nanjing and Hangzhou are expected to see potential growth spikes in transaction volumes and activity in the coming years due to the wealth spillover effect from more established markets and the relocation of industries.
China Commercial Real Estate Investment Outlook
Based on each market's tertiary value-added per capita and current CRE development, CBRE has categorized 286 Chinese real estate markets into the three phases: infancy, growth, and maturity. Beijing, Shanghai, Guangzhou and Shenzhen are typical maturity markets supported by robust infrastructure, a large number of investment-grade properties and improving liquidity. Mature markets are expected to enter a stability phase around 2035.
Between 2017-2020, CBRE believes there are six key factors shaping China's commercial property investment strategy.
1. Infrastructure - A total of 600 km of new urban railways will be added in tier-one and tier-two cities every year between 2015-2020, while 17 cities will commence the construction of subway systems, meaning that a total of 50 Chinese cities will have subway systems by 2020. 2. Urbanization - Over the past decade, 200 million people have relocated from the countryside into cities, creating massive demand for real estate. The rate is forecast to expand to 70% by 2030, bringing another 200 million residents into cities.
3. Belt and Road - Strengthening connectivity and cooperation between China and a number of Eurasian countries, this initiative is expected to drive logistics demand in Western China, resulting to the relocation of manufacturing industries and construction of local infrastructure.
4. Made in China 2025 - Launched in 2015, this initiative aims to establish China as a global manufacturing powerhouse by upgrading and relocating manufacturing businesses, which is set to create huge demand for business parks, high-end warehouse, and logistic facilities.
5. Demographic Change - China has the most senior citizens in the world; by 2030, one in every four Chinese citizens will be over 60 years old, which is expected to drive robust demand for senior housing.
6. Consumption Upgrading - Rising incomes and improving consumption structure will form a critical component of the Chinese economy. Commercial property will provide opportunities for investors while catering to urban residents' consumption upgrading.
CBRE Research believes that investment opportunities emerge in line with developmental phases of municipal economies and are therefore driven by local fundamentals.
"Investors are advised to focus on urban regeneration projects in major cities, tap into the shift of high-potential CRE investment markets into maturity phase, and explore new opportunities brought by the establishment of the new special economic zone of Xiong'an New Area and the One Belt One Road initiative," said Mr. Li.