Investors to increase China exposure despite US trade tension

Despite the ongoing trade tension between China and the US, over 50 percent of investors that participated in JLL’s latest investors survey plan to increase their real estate allocation in China in 2021. The survey interviewed 38 global and regional investors on how covid-19 is impacting their strategic investment decisions and planning.

China is the second most popular investment destination in the region after Japan, with around 51 percent of investors wanting to increase their exposure in the country, according to the survey. In particular, larger investors with over $20 billion AUM appear to want greater exposure in China – 76 percent of those investors plan to increase or keep their exposure the same, higher than the 69 percent of investors overall, according to JLL. The firm also indicated that intra-regional investors are more positive about investing in the country.

“Sophisticated global and cross-border institutional investors are taking a long-term view on the very positive China growth story and looking beyond short-term headlines,” explained Roddy Allan, chief research officer, Asia-Pacific, JLL. He also pointed out that general investor sentiment doesn’t suggest that US investors are pivoting away from China. Of the respondents who cited North America as one of their capital sources, their planned exposure to China between now and 2021 aligns with the total survey results, he added.

In particular, Allan noted that the country has seen significant institutional investment activity in alternative property types such as cold-chain storage, co-living, data centers and life sciences. For example, Singaporean sovereign wealth fund GIC partnered with GDS Holdings to build data centers in China while Chinese conglomerate Vanke also acquired a portfolio of cold-chain facilities in seven Chinese cities from Swire. Going forward, Allan expects investor interest in the alternative real estate sectors will continue to grow in the country.

Apart from China, investors have also identified Japan, South Korea and Australia as the top markets to see an increase in transaction activity as real estate investment volumes are expected to rebound in the first of half of 2021, according to the survey. Asia-Pacific real estate transaction volumes recorded $52.9 billion in the first six months of 2020, representing a decrease of $40.3 billion from the same period in 2019, according to real estate research firm Real Capital Analytics.

Although investment activity in the region is expected to recover in 2021, investors are dialing down their current return expectations. Around 90 percent of survey respondents expect 2020 total returns to be lower than 2019 returns – 64 percent expect returns to marginally deteriorate from 2019 levels, while almost 24 percent predict a significant deterioration.

In terms of investment strategy, around 82 percent of investors plan to retain or increase their exposure in the core space in 2021. Meanwhile, around 42 percent and 46 percent of investors also look to invest more in the core-plus and value-add spaces, respectively.

The survey showed that the lack of investment products in the region is the second-biggest obstacle for investors to deploy their capital, with the most significant challenge being the uncertainty in underwriting assumptions during the pandemic. Other issues include price uncertainty, travel restrictions and growing competition.

“From a macro perspective, Asia-Pacific is likely ahead of Europe and North America in terms of the economic impact of covid-19 and any subsequent recovery,” said Allan. “However, there are still clear downside risks, and how each country or region continues to manage the pandemic will have clear and significant implications for future real estate market performance.”