China has been on a path of economic transformation in the past few decades, moving from an investment- and export-oriented economy to one driven by consumption. Real estate has played a pivotal role as demand for commercial and residential property have grown. Research has shown that China is now the world’s second largest institutional market in terms of investible stock and is expected to grow as structural themes continue to play out, backed by central and local government spending on infrastructure.
Canada Pension Plan Investment Board (CPP Investments) is one of the world’s biggest investors in real estate and infrastructure and has been investing in Chinese property for more than a decade. PERE spoke with its head of Asia real estate Jimmy Phua.
What opportunities do you see for real estate investors as consumption becomes an increasingly important driver of China’s economy?
We have always looked at the real estate market in China through a consumption lens. If you look at the top eight to 10 cities in China, they are effectively proper consumption-driven economies already with a very sizable middle class.
That means opportunities in both the traditional brick-and-mortar retail and e-commerce – shopping malls, logistics and warehouses. Online retail accounted for more than 25 percent of all retail sales in China in 2019, according to the National Bureau of Statistics, and is growing at more than 20 percent each year. But unlike in the more developed markets where the growth of e-commerce comes at the expense of offline retailers, the first wave of shopping malls in China coincided with the rise of e-commerce, so offline retailers and malls in China are much better adapted to e-commerce. Most tenants in shopping malls have both an online and offline presence. On top of that, the overall consumption pie continues to grow in China as income rises.
For international investors, how do you navigate this market and find quality assets?
Working with the right partners is critical to success in this market. We have been fortunate to work with some very good partners – both foreign and local – who understand the market and have good assets. Equally important is having a team that understands the China market.
Have real estate prices in China run ahead of the fundamentals?
China is no different from the rest of the world in terms of market cycles. The low-rate environment has enabled people to borrow cheaply and invest. While asset prices have had a run, I don’t think there is a bubble.
The government has been quick to respond with policy measures at any sign of asset inflation, especially in the residential market. In the long run, China remains a very compelling market as its economy continues to expand. It will be too big to ignore for any major real estate investors into Asia.
Where do you see the market in 10 years?
I expect the market to mature significantly and become more institutionalized. It will borrow best practices from the West but also evolve its own unique practices. Investible products will grow both in scale and scope. Alternative sectors such as multifamily, senior housing, medical offices and others still nascent or not present in China will take root. While foreign investors will continue to play a role, in the next decade, we are going to see a much larger domestic pool of capital in the real estate market. Chinese insurance companies and pension funds will play an increasingly important role in the market, which is currently dominated by developers and state-owned enterprises.