Moonbridge: Supply-demand imbalances in inland China

There are market imbalances in China’s inland cities that have led to development saturation, according to a report published by private equity real estate firm Moonbridge Capital.

China’s inland cities have attracted an abundance of real estate investors, and the property supply-demand dynamic in its markets could take as much as 18 months to straighten out, according to a recent research report by Moonbridge Capital.

In the residential space, for example, development has outstripped sales in the country for three years running, the firm said. Across 20 major cities, for middle-value homes, in 2011 there was 180,000 new developments launched but only 125,000 sales. The disparity in 2012 was much less stark (140,000 launches and 135,000 sales), but Moonbridge forecasted that close to 13 percent of residencies will remain unleased in 2013. The number of unsold units in China is now at record levels, and the cities with the most unsold units are actually the inland cities of Wuhan, Shenyang, and Chengdu, according to the firm.

The office market is even more ‘unbalanced’, Moonbridge said. Leasing in China’s “inland markets [was] noticeably stronger, reflecting their proportionately lower dependence on [multinational corporation] demand,” according to the report. Yet, it is the inland cities that now face an oversupply of office space. Chengdu, for example, is expected to deliver 25 percent of the entire country’s new supply in 2013, and other inland cities are expected to deliver close to 40 percent altogether.

The root of the supply problem, explained Moonbridge’s research and strategy director Tim Jowett, was actually the attractive dynamics of China’s inland cities. In Wuhan, for example, Grade A rents increased 25 percent year-on-year, while demand surged 44 percent as more companies began moving their central headquarters to the city, he said.

“It’s a very attractive market, but the problem is that everyone recognized this at about the same time,” Jowett said. With city governments keen to draw in foreign direct investment and real estate investors with incentives and good infrastructure, the supply side of China’s inland markets has become “horrendous,” he added.

Investors therefore must judge carefully when they enter China’s markets, Jowett said. He expected that the supply-demand imbalance would be a problem for around 18 months.

“When making investments now, we need to be thinking of the medium term – we don’t want to be in a position where we have to get out fast,” Jowett said. For offices – which he thinks will be Moonbridge’s primary focus – the firm is trying to envision how each asset will be performing between 2016 and 2018.

Jowett is confident that China’s inland market will sort out, however, because Beijing had a similar supply-demand problem right after the 2008 Olympics. Although everyone thought investors should stay out of Beijing for many years, within two years all the excess supply was let and rents were already rising. “It’s just a testament to how quickly things can change,” he said.

Moonbridge currently is raising equity for its Moonbridge Capital Greater China Development Fund, for which it hopes to attract $400 million. No equity closings for the debut vehicle have yet been announced.