Private real estate goes domestic as a trade war workaround

Some institutional real estate managers believe China’s domestic consumption insulates its real estate from Trump’s tariff hikes.

Any hopes of an end to the now protracted US-China trade war were shattered once again on Monday after the US president Donald Trump announced a hike to 25 percent on trade tariffs on $200 billion of Chinese goods. One CNN report said business owners were “freaked” by the sudden escalation of the bilateral tension it caused.

Cue tumbling stock markets: the Dow Jones Industrial Index and Hang Seng Index plunged up to 1.3 percent and 3.6 percent, respectively, on the news as industry observers warned how the ongoing uncertainties will cost both countries’ economies.

Real estate managers in China have been among the first victims of the trade war. There was a 73.3 percent drop in cross-border investment in the country in Q3, 2018 when the US implemented its first China-specific tariffs. But they have been among the first to recover, too; transaction volumes bounced back more than eight times in the following quarter, according to data compiled by real estate transactions research firm Real Capital Analytics. Have they unearthed a secret to circumvent the negative fallout of the trade-war?

Possibly they have. Certain managers that have stayed committed to Chinese property markets tell PERE there are ways in which they can insulate their strategies from the macro storm above: a bias toward investing in buildings with tenants where their business is driven by domestic demand.

Consumption accounted for more than 60 percent of total Chinese GDP growth in 10 of the 15 quarters since 2015, according to a report by consultant firm McKinsey & Company in December 2018. Unsurprisingly, that ratio shot up to 80 percent in the first half of last year.

China is a big enough market to maintain its own momentum and managers do not even need to compensate for a decline in international trade by venturing into its third- and fourth-tier cities. As one of the world’s biggest real estate managers told PERE this week: “You look at places where you can find the economic growth.” The manager in question is one of the largest international institutional landlords currently operating in the country.

Take Hangzhou as an example; it is the city where online retail champions Alibaba has its headquarters and has subsequently become a center of the country’s technology development. Hangzhou has witnessed significant growth in both GDP and population. According to a Savills research paper published in 2018, the Hangzhou permanent population grew 3.05 percent year-on-year, reaching a total of 9.47 million in 2017. As PERE’s manager argued, population growth will drive the demand. While the country’s traditional manufacturing sectors are slowing, its technological development is blooming. He expected the demand for offices from the technology sector to increase in tandem.

Another example of this approach is Singapore-based logistics giant GLP; more than 90 percent of GLP’s facilities are now dedicated to domestic consumption, a conscious repositioning strategy implemented over a decade ago. As their investments have little or no relation to imports and exports, it has made it one of the international real estate managers that saw little impact of trade war on their investments in China. In fact, GLP has enjoyed a decade of compound AUM annual growth of 50 percent since 2011, with its China portfolio at the vanguard. The firm’s revenue in China also increased by 10 percent year-on-year to $586 million in 2017, according to the latest annual report published by GLP before it was delisted in 2018.

GLP’s strategy is based on the belief that the growth of China will follow other mature economies like Japan, the US and Europe, where the majority of economies are dominated by domestic institutions.

A trade war deal will only bring temporary peace to the market; there are always other macro-economic events to take centerstage. But unlike the stock markets that have reacted so sensitively to Trump’s proclamation on Monday, private real estate reacts much slower to global events, giving its most considered practitioners time to meditate on considered workarounds like a domestic-heavy tenancy strategy.

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