The global property services firm said a change in China’s urbanization policy instigated this month could spell good news for residential and industrial real estate development in lower-tier cities.
In a policy announcement made this month, China’s State Council eased its eligibility controls on urban residency permits to allow greater rural to urban migration. As more laborers and rural families get drawn into the urban fold, the demand for real estate in tier one and two cities is expected to escalate, global property services firm CBRE said in a note reacting to the change which it published yesterday.
The most direct impact, according to private real estate investment managers, will be on the demand for low-cost, subsidized residential portfolios. According to PERE sources, opening up entry barriers would encourage many low and middle income workers to relocate to neighboring cities.
“The impact on commercial and retail real estate is only likely to be in the long term; a few years after they [rural migrants] have accumulated wealth, said Stephen Yuen, chairman and chief executive officer at InfraRed NF Investment Advisers. “Right now, the pressure is only on the government to create low cost housing, not private players.”
Yuen was not convinced about this reform’s immediate benefit to private equity real estate funds in China. In addition, the company’s own InfraRed NF China Fund I investment fund was invested into office and retail projects in China, and not residential development since “it is a volatile market with substantial taxes,” according to Yuen.
However, certain tiers of retail assets in these regions could become attractive investment options as a result of the change. Middle level community-based shopping malls, according to Eddie Heng, Executive Director, Head of CBRE Consulting, are one such avenue, especially for specialized funds.
Labor-intensive industries and low-end manufacturing firms too, are likely to gain from the increased supply of workers, added Yuen.
The report highlighted some other implications. Many of these industries, according to the report, would relocate inland because of cheaper labor and government’s pressure on low-cost manufacturing in coastal regions. In Yuen’s view, the regions that are likely to emerge as investment hotspots following this reform include Guangdong and industrial clusters such as Xian and Yunnan in the north-west part of the country. However, since many of the retail and commercial real estate gains from this regulatory reform will only be realized in the long run, private investors should hope for a continued general commitment to reform.
“This is the starting point of change,” said Yuen. “The major task of central government is to review other regulatory policies –mortgage, bank loans and sale of land – that affect real estate.”