In 2006, Jones Lang LaSalle (JLL) produced a guide to Chinese real estate investment opportunities in 30 of the most attractive cities outside the main metropolises of Beijing, Shanghai, Guangzhou and Shenzhen. Since then, the pace of economic development in the country has been such that the global property services firm’s latest research is called the China50.
“The China50 cities are an economic powerhouse in themselves,” said Jeremy Kelly, regional director in JLL’s research division, at a recent presentation in London. “Based on forecasts from our Global Foresight series, we have calculated that the growth in these markets will account for 12 percent of global economic expansion to the end of the decade.”
Kelly noted that the China50 reflects an economy worth $3 trillion – equal to the size of Germany today. “If it was a single entity, it would be the fifth largest economy in the world,” he said. “We looked at all of the world’s cities with populations of more than 3 million people, and 10 of those were in the China50.”
Where are the opportunities for institutional investors? JLL has ring-fenced nine cities dubbed ‘Tier 1.5’ that are “head and shoulders above the rest.” Kelly said these cities have large, open and diverse economies with a strong presence of multinational companies. Of these nine cities, Chengdu, Chongqing and Tianjin are the standout markets and, of those three, Chengdu takes pole position.
“Chengdu has emerged as very much the premier real estate market,” said Kelly. “All our measures indicate it is emerging rapidly as the preferred location for many multinational corporations and retailers wishing to establish a base in China.”
Retail and logistics are JLL’s choice property types due to the “inexorable rise of the middle classes. “By 2020, there will be substantial depth in a population with disposable incomes of more than $5,000 per year,” Kelly said. “And that hasn’t gone unnoticed by international retailers.”
JLL predicted about 100 million square metres of retail property will be developed across the China50 by 2020 and that will account for 80 percent of the investible stock in the country. Kelly said retailers are following developers as they expand into lower tier markets, attracted by the “quality of the stock” they produce.
Logistics should be regarded as the backbone of the economic modernisation of China, Kelly argued. The country’s status as a manufacturing hub, the expansion of the domestic economy, the growth of organized retailing and the expansion of e-commerce – all point to strong growth in the sector. Despite these factors, there has been little development thus far.
“Across all of China, including Tier I, we calculated there’s no more than 13 million to 14 million square metres of Grade A logistics stock – no more than The Netherlands or greater Boston in the US – and we’re talking about the world’s second largest economy,” Kelly said.
The story for offices is different, particularly outside of JLL’s Tier 1.5 cities, where occupational demand is “thinner.” Kelly warned that certain markets, such as Shenyang, have experienced vacancy rates between 40 percent and 50 percent, although much of that is due to poor quality assets. On the positive side, within the nine cities, multinational corporations are being joined by increasingly sophisticated domestic occupiers of Grade A space. “We’ve seen a sea change in local companies acknowledging the value of Grade A accommodation,” he added.
Another takeaway from Kelly’s presentation was increasing demand by occupiers to expand inland. “Chengdu and Chongqing have both benefited from the ‘Go West’ government policy to promote activity in mainland China,” he said.
In addition, while the China50 are expanding at a phenomenal rate, there remains a big gap between them and Beijing and Shanghai. “While these markets are maturing and developing very rapidly, Shanghai and Beijing are developing just as fast,” Kelly added.
Any prudent investor should be aware of “the many elephants in the room” when considering investments in China ex-Tier I, Kelly warned. He described a “plethora of challenges,” including supply-demand imbalances, poor market transparency, a lack of property management and, crucially, China’s vulnerability to global economic volatility. “China has not decoupled from the global economy, even if some of the inland cities are more resilient than those on the coast,” he said.
Kelly began his presentation immediately after Marina Petroleka, head of energy and infrastructure research at Business Monitor International, presented an altogether bleaker portrayal of China’s economic prospects and the role played by real estate. Predicting a US-style subprime mortgage crisis would unfold largely due to reckless lending and borrowing habits, she forewarned that China’s property markets remained in “bubble territory” and were due a “hard landing.”
“I perhaps might be a little more bullish than Marina,” Kelly quipped before giving his presentation. It was clear from his showing that, as JLL sees things, China comes with its risks but its growth is still nothing shy of astounding.