Chinese investors look to Tier 1 and abroad

Real estate investment in China’s smaller cities is shrinking as a consequence, delegates at Cambridge University’s International Real Estate Finance and Investment Conference held in Hong Kong heard today.

In the last few years, second and third-tier cities in China have drawn substantial real estate investment. Buoyed by increasing urbanisation and migration of rural workers to neighbouring cities, institutional investors have been deploying capital in to low-cost housing projects, industrial complexes, and community malls in smaller cities. 

However, according to a panel at Cambridge University’s International Real Estate Finance and Investment Conference held in Hong Kong today that tide seems to be reversing.

“A lot of insurance companies and institutional investors are withdrawing capital from Tier 3 and 4 cities, and focusing their strategy on Tier 1 cities,” said Jhonny Shao, executive director, co-head of investment properties at CBRE China.

There is no formal definition of what constitutes a “first-tier”, “second-tier” or “third-tier” city in China. However, it is commonly agreed that Shanghai, Beijing, Guangzhou and Shenzhen represent the top tier, while the provincial capitals are classified as Tier 2 cities.

Shao said the market performance is different for each tier, partly due to government policies.

“Beijing, Shanghai and Shenzhen have a healthy office and retail market, with big transactions while Ningpo’s office sector is not [doing] that good,” he said. “On the residential side, restrictive policies have been lifted in only 4.5 main cities.”

China’s macroeconomic climate and demographic profile is further adding to the appeal of the megacities. 

According to Wilson Chen, chief investment officer, China and managing director of the equity capital markets at US developer cum fund manager Tishman Speyer, with more ‘young elderly’ people remaining productive at work for longer periods, the demand for housing in the main cities will further increase.

Areas within close proximity of Tier 1 cities are also emerging as an attractive investment destination. The city of Suzhou located adjacent to Shanghai, for example, has fast become a major commercial centre.

However, even as investment in prime gateway cities continues to surge, the returns often are not commensurate to the risks taken. 

A high-grade office asset in Shanghai, according to CBRE’s Shao, would yield a cap rate of around 4 percent, while a similar property in London might generate 6 percent. 

“There is too much money chasing too few quality investment-assets. This high demand has driven prices to high levels,” Humbert Pang, managing principal at Gaw Capital Partners said at the conference.

As such, several Chinese insurance companies have been ramping up their overseas real estate portfolios even as their domestic allocations remain muted. This is largely to do with the difficulty in finding the “right investment property in Shanghai”, according to Pang.