Private real estate to take notes as China re-opens

The world’s property markets are watching the country’s doors re-open for indicators of life after coronavirus

It always stood to reason that China, the country where the world’s coronavirus pandemic originated at the end of last year, would be furthest along in its recovery today. That has borne out, as commercial properties in the country started re-opening their doors at the start of April.

CapitaLand, the Singapore-based manager and one of China’s biggest mall owners, is among a number of commercial landlords to re-open following a two-month lockdown. Others include retail developer Chongbang Group, Chinese real estate giant Wanda Group and Singapore-headquartered real estate investment firm ARA Asset Management.

But while consumers return to its premises, it will take time for their re-engagement to translate into a return to the kinds of earnings CapitaLand and its peers enjoyed prior to the outbreak. Indeed, according to senior executives PERE spoke to, the extent of China’s recovery will depend in large part on how the rest of the world fares.

“The rest of the world is still in lockdown. So the demand for real estate in the country may remain weak until the US and Europe show some signs of recovery,” says David Green-Morgan, managing director at real estate transactions research firm Real Capital Analytics.

Recently, demand has looked lackluster. The Chinese real estate market saw 28.2 billion yuan ($4 billion; €3.69 billion) of real estate traded in the first quarter of 2020, down 70 percent year-on-year, RCA says. Within that total, just 37.4 percent was investment from foreign investors, compared with over 62 percent the year before.

Blaming coronavirus-prompted international travel restrictions for the slowdown, Hei Ming Cheng, founder and chairman of Warburg Pincus-backed real estate investment firm KaiLong Group, said in a webinar hosted by the Asia Pacific Real Estate Association that investment volume in China will “remain depressed for the first half of the year.”

He noted how his own firm’s deals have been delayed and these experiences have him predicting cap-rate expansion as assets reprice, underwritten against uncertain income streams.

At Singapore-based ARA Asset Management, meanwhile, both asset managing and acquisitions in a post-covid environment are on the agenda. “We are focusing on asset management at the moment,” says Alvin Loo, the firm’s head of China. “Making sure our existing assets continue to perform, to catch-up to pre-covid-19 levels soonest.”

He adds: “We are also keeping an eye out for deep-valued opportunities. But, they have to be very attractive for us to pull the trigger in this environment.”

At ARA’s malls, footfall has returned to about 70 percent of pre-crisis levels, a marked improvement on the approximately 20 percent level seen in January as the virus was taking a hold of the country. But this return to activity has not translated proportionately into the same recovery in retail sales at the properties. These were at 60 percent of pre-crisis levels, Loo says. Further, he believes this partial return to pre-coronavirus form will continue until the pandemic stabilizes globally and consumer confidence returns.

Predictably, domestic consumption in China remains curtailed, Lijian Chen, senior executive president at Shenzhen-based manager COS Capital, said at the APREA webinar. He pointed out how people still avoid large crowds, despite being granted more mobility by authorities.

Furthermore, the crisis cut many incomes, leading to notable curbs on spending powers. Indeed, for the first time since 2013, China saw a 3.9 percent year-on-year drop in per capita disposable income in the first quarter this year, according to its National Bureau of Statistics. As such, as businesses re-open, their cashflows are expected to re-instigate at lower levels.

Loo says many tenants have already asked for rent holidays and he expects rent resumptions to come with a degree of negotiation, ultimately resulting in it presiding over lower income producing assets. At ARA at least however, current rents are covering its credit obligations.

But at this point he says it is too early to tell how many tenants will ultimately survive. The “lack of confidence and restraint on spending is quite real,” he observes. Loo says many retailers in particular are adopting a “wait-and-see” attitude before signing new terms. Given these considerations, he predicts a 10-15 percent rent reduction from a softer leasing market.

RCA’s Morgan believes predictions from China’s institutional landlords should be seen as early indicators for the fate of other markets. He expects most countries to see a decline in transaction activities, but thinks the rest of the world can observe China’s re-opening for indicators relevant closer to home.

Green shoots

Other researchers agree. A JLL report, published in April, also identified “green shoots” in China’s real estate market for managers to reference.

Around 87 percent of hotels in China have re-opened since March. But the occupancy rates remain below 30 percent as travel bans for foreign visitors are still in place. However, JLL spotted a relatively higher rate among resorts near major cities, stemming largely from ‘stay-cationing’ domestic guests. Overall, JLL says China’s hotel sector will take eight to 12 months to fully recover.

Retail properties are expected to prove less resilient, according to the report. With second-quarter performance numbers to come for a sector already battered by multiple headwinds even before coronavirus, there are few believing a return to even pre-virus performances is in the cards.

While certain international retailers will continue to have a presence in China’s major malls – apparel provider Canada Goose and luxury penmaker Montblanc to name two – JLL says better fortunes lay ahead for supermarkets, given the necessity spending associated with this kind of retail property. Business at Suning local grocery stores reportedly climbed more than 400 percent in the first two weeks of the pandemic response, compared with the same period last year.

For the discretionary spend retailers, meanwhile, adopting more sophisticated online offerings remains high on the agenda as a means of survival.

Offices in China have seen the greatest levels of re-activation. JLL reported Shanghai offices saw a 100 percent return to occupation. Elsewhere, Chengdu saw an 80 percent return.

Again, however, this does not mean landlords are seeing a return to the same income levels as before the crisis, with certain tenants using their return as a catalyst to renegotiate lease terms.

Predictably, the report says the property with the lowest human occupation, logistics, has proven most robust during the pandemic. Retailers’ distribution channels impacted warehouses, but this was mitigated in part by accelerated e-commerce penetration, particularly in fresh food e-commerce. Providers like JD Fresh and Dingdong Maicai recorded over 200 percent increases in daily active users during the Chinese New Year period compared with the year before.

Apart from fresh food e-commerce, cold chain logistics is also emerging from the outbreak stronger as the country recognizes the need to store pharmaceuticals and medical equipment.

JLL says China is only experiencing the “first stages of a gradual recovery.” But both Loo and Cheng remain optimistic about the country’s real estate market in the mid-to-long term. For them, the country’s growing middle-class is a positive demographic force more powerful than the world’s worst-ever coronavirus pandemic.