China’s recovery from the pandemic – and the strictures of the government’s “zero covid” policy – has been slower than expected, and a number of real estate sectors are battling with oversupply. Meanwhile, domestic investors are becoming a more important source of capital, as some foreign investors are reluctant to allocate to China.
The prime reasons for the lack of allocations from some North American and European investors seem to be political, but China’s uncertain recovery has bolstered decisions to stay away. This bifurcation became clear in January, when PERE reported that Gaw Capital Partners had created a separate sleeve for up to $600 million of capital commitments to its Gateway Real Estate Fund VII vehicle, to accommodate investors that did not want to invest in China. Other Asian funds are understood to be using similar strategies to accommodate investors looking for Asia ex-China exposure.
In March, Dutch manager Bouwinvest Real Estate Investors said it had sold its listed investments in China and had ceased new unlisted investments due to concerns over China’s failure to oppose the Russian invasion of Ukraine and its stance on Taiwan.
One manager notes that, prior to 2022, international investors provided 70 percent of capital for its development funds, but that this has fallen to around 50 percent, and lower for USD-denominated investors.
However, overseas investors from the Middle East and Asia continue to allocate toward China, and Asian investment managers continue to target the world’s second-largest economy. Earlier this year, Singapore-based CapitaLand Investment launched a S$1.1 billion ($812 million; €743 million) CapitaLand China Opportunistic Partners Programme to invest in special situations in the country, and a S$1 billion data center fund, CapitaLand China Data Centre Partners. Fellow Singaporean manager Mapletree Investments raised $930 million for a China logistics fund last November and pledged to double it in size over the coming decade.
$25.7bn
Total amount targeted by funds in market
At the same time, the pool of domestic capital is growing, with Chinese insurance companies and state-owned enterprises (SOE) the main sources of capital. “Domestic insurance companies and SOEs are keen to invest in the industrial and logistics sector, in both stabilized assets and developments,” says Jeffrey Shen, co-founder and co-chief executive of Hong Kong-listed ESR Group.
“For insurance companies with a cost of capital of 3.5-4 percent, industrial and logistics is the only sector where stabilized assets offer high enough yields. We sold $1 billion of stabilized assets to domestic investors last year and expect to sell more this year.”
More managers are looking at raising yuan-denominated funds or launching Chinese real estate investment trusts. For example, ESR is in the process of listing three of its China logistics parks in a C-REIT, while Tishman Speyer said earlier this year that it intends to launch more RMB funds for Chinese investors.
The continued traumas of China’s large residential real estate developers continue to grab headlines. In August, Country Garden, which has total liabilities of 1.4 trillion yuan ($193 billion; €176 billion), announced that it would make a loss of 55 billion yuan for the first half of 2023. The company also suspended trading in its bonds.
Too big to fail
The Chinese government has pledged more support for the real estate market and indicated this support would be available to both developers and end-users, but sentiment over residential remains weak.
Multifamily could be a bright spot in the residential market, says Andrew Moore, head of real estate, Asia-Pacific, at Schroders Capital. “Ongoing urbanization, expansion of the middle class, and smaller household sizes are the key factors behind increasing demand for rented residential accommodation. This asset class enjoys policy support. The multifamily sector is expanding in China, which could one day become APAC’s largest multifamily market, ahead of Japan.”
Looking at commercial real estate, he says: “The combination of continued heavy supply in Tier 1 cities and weaker than expected economic growth has depressed office leasing markets, and the office vacancy rate is around 18 percent in both Shanghai and Beijing.”
The industrial and logistics sector has been steadier this year, however, says ESR’s Shen, especially for “new economy” tenants. “Demand from [electric vehicle] and EV component manufacturers or those in the renewable energy sector remains strong, for example, whereas demand from e-commerce or [third-party logistics] tenants is flat,” he says.
“Demand should improve in 2024, however.”
Shen says patience will be required: “The China economy and real estate market is recovering but it is slow and will take time.”
November 2022
GLP held a $1.2 billion first close for its new flagship value-add logistics fund for China, GLP China Value-Add Partners IV, and also announced the final close of its GLP China Income Fund VII on 5.4 billion yuan ($743 million; €713 million)
January 2023
New York-based real estate giant Tishman Speyer sold a 10-building office campus in China to Singapore’s CapitaLand Investment for 7.6 billion yuan
June 2023
Ivanhoé Cambridge, the real estate investment management business of Canadian institutional investor Caisse de dépôt et placement du Québec, said it will close its office in China by the end of 2023 and manage its 29 Chinese assets from its other Asia offices
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