Despite ongoing economic cooling and a clampdown on lending to the real estate sector, 2018 marked a record year of Commercial Real Estate (CRE) investment in China on the back of growing investment by foreign players. The strong investment demand continued in Q1 2019, with RMB81 billion (appx. US$12 billion) invested within Mainland China, up by 14.6% y-o-y. Foreign capital accounted for a 35% share, rising from 31% in 2018.
In contrast, demand in Hong Kong and Taiwan was relatively muted in Q1, being affected by global economic uncertainties and slowing demand from mainland Chinese investors.
Office remained as the most favored asset class, accounting for 39% (excluding mixed-use) of the total investment consideration within Greater China. While office assets will likely remain the most favored given relatively stable cashflow and ease of operations, future supply is a potential concern.
However, given the tight lending environment and increasing vacancy (18.1% as of Q1), we expect many developers to delay project launches, relieving pressure on the supply side.
Retail Sector Shaping the Economy
Retail in second place, retail accounted for 11% of the total investment (excluding mixed-use). As 76% of GDP is driven by private consumption, the retail sector is increasingly shaping China’s economy. A fast-changing consumer environment means it is critical that retail real estate investors build strong asset management and operation teams. Listed investor data shows some well-managed retail malls in China can reach NOI yields as high as 6 to 8%. Aside from traditional retail operations, health & lifestyle, culture & entertainment and education are increasingly in demand. Ahead, with China’s recent reforms to personal income tax, we expect this will further boost retail sales growth in 2019.
Besides investment in office and retail, many investors are increasingly targeting a more diverse portfolio to balance risks and returns. Aside from the red-hot logistics sector, co-living investments are increasingly sought on the back of a growing “sharing economy.” According to The State Information Center (SIC), China’s sharing economy (including co-living, co-working, shared rides, etc.) jumped 41.6% y-o-y in terms of revenue in 2018. In particular, the number of co-living users stood at 79 million in 2018, up from 10 million in 2015, and the average annual revenue growth in the segment between 2015 and 2018 reached 45.7%, 12.7 times higher than the revenue growth in traditional residential leasing. With the introduction of China’s Co-living Services Standards Guideline by the SIC in November 2018, the segment is expected to benefit from increasing regulation, potentially reducing the risks for prospective buyers.
Get the full data and insights into China’s property market in our Greater China Capital Markets Express report.