Roundtable: China turns a corner post-reopening

Lockdowns blighted 2022 for Chinese real estate, but PERE’s China roundtable participants say recent policy changes have boosted confidence.

This article is sponsored by DNE Group, Funlive, LaSalle Investment Management


China had a rocky 2022. The real estate sector was no exception, having felt the fallout from the government’s covid measures. However, real estate experts are confident the world’s second-largest economy will bounce back. Even in the depths of the country’s difficulties, sectors such as logistics and multifamily remained resilient. The year even saw a flurry of Chinese real estate investment trust listings, cementing a new asset class for institutional investors and a new exit route for investment managers in the process.

The nation’s real estate market was the first to be hit by the effects of the covid pandemic and associated public safety policies in 2020. China was also one of the last nations to lift public health measures, as Beijing announced on December 7 that it would lift its ‘zero covid’ policy.

China’s economy and real estate market began rebounding in late 2020. To some onlookers, it even seemed ahead of much of the rest of the world in 2021. However, a series of further outbreaks and subsequent, punishing city lockdowns in 2022 hurt the economy: the World Bank expects the country’s GDP to have grown by only 2.7 percent last year. There was political instability, too, signaled by widespread protests against the government’s approach. The end of zero covid led to a sharp rise in business optimism, followed by an even sharper rise in covid cases. Chinese government data on the outbreak has been sketchy, but hundreds of millions of people are believed to have been infected, albeit with milder variants than those prevalent toward the start of the pandemic.

The economic restrictions hit real estate investment markets hard. According to MSCI Real Assets’ preliminary data on China real estate transactions, the last quarter of 2022 saw $1.9 billion of investments, compared with $20.2 billion for the same quarter in 2021.

Meanwhile, the ANREV Quarterly China Fund Index shows a sharp drop in net total returns in 2022, with one-year performance to Q3 2022 of -9.85 percent, although the index is relatively small with gross asset value of $6.2 billion.

PERE’s China roundtable convened in mid-December – after the end of zero covid, but before the spike in cases in late December and early January. Nonetheless, a wave of infections was widely expected.

Keith Chan, chief executive of China-focused multifamily housing operator and investment manager Funlive, says: “The general consensus in China is that there will be bumpy situations in the next one to two months, because a lot of people will get infected with the latest Omicron strand. At this rate, two to three months later, most of the people will have been infected, raising the herd resilience factor.

“The domestic institutions and the C-REITs provide two excellent core markets for real estate managers and developers to sell to”
Keith Chan

“It could take some time for consumer and business confidence to return because a lot was lost in the lockdowns, the threat of which made decision-making very hard.”

Chinese real estate professionals are enthusiastic about the prospects for recovery, but realistic about the time it will take, says Winnie Yu, managing director, logistics, acquisitions and asset management for Chicago-based manager LaSalle Investment Management.

She says: “People will be able to move around China again for family and business meetings, for work and leisure, which will boost hospitality and commercial real estate. More mobility will also benefit the multifamily and logistics sectors. And, of course, we will be able to meet tenants and investors, to see assets and do business face to face.

“However, it will take some time for things to settle down, at least one to two quarters, to build back confidence. And then, from the second quarter towards the third quarter, we will see some positive signals.”

Martin Chen, chief investment officer at Chinese new economy-focused manager DNE Group, adds: “Sentiment is changing, and I think it will improve over the next 12 months, as the country settles down after the loosening of the zero covid policy. Sentiment for retail and hospitality will improve and consumption power will be unleashed as well. I also think that more resilient sectors like logistics will also benefit.”

Onshore-offshore gap

While sentiment regarding Chinese real estate is certainly improving, the gap in enthusiasm between foreign and domestic investors has been growing in recent months. The panel believes it will take time for foreign investors to recover their enthusiasm, even though they are by no means out of the market.

Chan says: “In the current environment, most investors are maintaining a cautious posture on China, especially foreign investors with a global allocation perspective. They are concerned about geopolitics as well as the economy, which has been negatively impacted by the zero covid policies. However, experienced overseas investors, domestic institutions and owner-operators like Funlive remain active.

“Domestic investors have been active for a while but they have become more important recently due to a slow-down of overseas investment interest.”

Indeed, foreign investment in Chinese real estate assets slumped dramatically in 2022 compared with the previous year. MSCI data shows that only $6.4 billion of transactions involved a foreign buyer in 2022, compared with $14.6 billion the previous year.

LaSalle’s Yu says: “It has been hard for foreign investors to make decisions this year. They have to take the approach of wait and see first. They will want to see some positive signals and it could be the second half of 2023 [before they return] because they want to see improved economic data, improved leasing data and other metrics.”

Difficulties in distress

Our roundtable participants point to distressed situations in the Chinese real estate market, but they also see barriers to entry.

The upheaval caused by pandemic lockdowns and regulatory measures intended to cool the Chinese residential market has created distressed opportunities. But these are rarely straightforward.

Funlive’s Keith Chan says: “Many players in China look at the residential for sale sector, which is 80-90 percent of the real estate market, and which has had a challenging time, and expect to see distressed situations at attractive pricing. There are opportunities, yes, but many distressed projects are extremely difficult to execute and time-consuming. You need to be very cautious.”

In commercial real estate sectors, there are opportunities where developers are looking to sell assets in order to maintain liquidity. However, lower pricing tends to come with complications. DNE Group’s Martin Chen says: “We see distressed opportunities in the industrial sector which look attractive, some of which could be accessed via debt at a good price. However, you need to be very, very selective and careful.

“For example, we saw a warehouse on offer because the owner went bankrupt. However, when it purchased the land for development, it made a number of commitments to the local government and the obligation for these will be transferred to the next owner. So it is not just a case of buying cheap and doing some asset management work. The players who can really ride on these opportunities are the ones who are able to negotiate with local governments and know what the local governments want.”

Winnie Yu of LaSalle Investment Management says her firm has been able to acquire some assets at lower prices, but “working out real distressed opportunities is a lot of time and stress, so being very selective and focusing on downside protection is more important in this market.”

DNE’s Chen, however, believes that if China can recover quickly, overseas investors will not want to miss out. “Foreign investor sentiment will depend on the Chinese economy, and this can bounce back really quickly,” he says.

However, the picture is not as simple as ‘foreigners out, locals in.’ Foreign managers, which have roots in China and supportive investors, have continued to invest, albeit cautiously. LaSalle, for example, raised $972 million for its China Logistics Fund in October 2021, and Chinese managers report that investors from the Middle East and elsewhere in Asia are less reluctant to commit capital than their counterparts in Europe and North America.

“Investors are focused on risk-adjusted returns and, at the moment, they are very concerned about risk and always looking for risk mitigation in any transaction”
Martin Chen
DNE Group

Furthermore, domestic and overseas investors are often looking for different opportunities. “Most of the offshore investors are not interested in core assets,” Chen says. “They are looking at ‘new economy’ sectors. For example, the life sciences sector has proven very resilient, and sentiment has remained strong from overseas investors. However, the lack of stabilized assets means domestic institutional investors are less involved.”

This is backed up by DNE’s experience. In April last year, it formed a $1.2 billion joint venture with an Asian institutional investor to invest in life sciences real estate in tier-one Chinese cities. Meanwhile, Dutch pension manager APG Asset Management made its debut life sciences real estate investment in Asia-Pacific with healthcare specialist CBC in 2021. The investor committed close to $500 million to the CBC China Life Science Infrastructure Venture.

One bright point for China is that it has been less afflicted by inflation than other large economies and did not see interest rate rises, nor a dramatic increase in the cost of construction materials in 2022. However, the changing interest rate environment in the US and Europe may affect investors domiciled there, as they have seen their risk-free rates rise.

The difficult environment in 2022 means Chinese domestic institutions investing in real estate – chiefly insurance companies – have also been cautious. Chen says: “We talk very often with life insurance companies and see that their investment criteria have been tightened and become more stringent. For example, they still like logistics assets. But they will put more emphasis on buying assets in good locations in good cities.”

All investors in China are demanding more from their managers, says Yu. “Investors really want to know what’s going on in the market, so we have been sharing more information about asset performance, market performance and tenant activity. We have also factored more risk protection into underwriting for our investors in this environment, and we might increase our holding periods for prudent underwriting. With regard to financing terms, we’re trying to be more prudent as well.”

Chen adds: “Investors are focused on risk-adjusted returns and, at the moment, they are very concerned about risk and always looking for risk mitigation in any transaction and seeking protections such as NOI guarantees and EBITDA guarantees from operators.”

Local currency draw

The growth of domestic institutional investment in real estate means managers are rushing to create RMB fundraising platforms. DNE has already raised a number of yuan-denominated funds, while both LaSalle and Funlive are investigating that market.

DNE’s Chen says the growth of domestic investment and RMB funds forms a virtuous circle: “We see more participation from domestic investors because there are more developed, mature, core assets for institutions today compared to five years ago. We have worked with many institutions for some time and successfully closed RMB funds so are confident going forwards.”

Funlive’s Chan says: “We have been exploring RMB funds and note that domestic investors want to know that you have assets available for investment and don’t want to invest in blind pools. They also want to see a track record from the manager.

“The domestic institutions and the C-REITs provide two excellent core markets for real estate managers and developers to sell to. Previously, most transactions were around assets being sold amongst similar types of companies and managers on a value-add strategy and move on to the next project. Now we have two channels for stable, long-term ownership.”

“The C-REIT is huge, it is a revolution for the market”
Winnie Yu
LaSalle Investment Management

Logistics has been the favored sector in China for some years. Covid has not altered that, although strict lockdowns in cities with multimillion populations made life as difficult for logistics owners and operators as for everyone else. More recently, the multifamily residential sector has begun to gain traction, with some international investors claiming China could be the biggest rental residential market in the world.

“The two big themes of investment by domestic investors are logistics and multifamily,” says DNE’s Chen.

Overseas investors also remain interested. “We look at sectors such as manufacturing, business parks and data centers, but remain focused on logistics and multifamily because we see them as resilient and offering market liquidity,” says Yu. “Generally, these resilient sectors are doing quite well, but we expect to see pricing move in the hospitality sector and the office sector. However, you still need to be diligent to find the right deal with a good entry price.”

The key deal in the industrial sector came early in 2022, when Singapore-based specialist manager ESR bought a portfolio of 11 logistics assets in Shanghai from New York-based manager DLJ Real Estate Capital Partners for a reported 4.4 billion yuan ($692 million; €653 million) and off a cap rate believed to be as low as 4.3 percent. Singaporean sovereign fund GIC was reportedly a capital partner in the deal.

“For a single deal, the DLJ deal was remarkable because the cap rate was surprisingly low, even for the logistics sector,” says Yu. However, the logistics market weakened as the lockdowns took hold. She says: “Logistics pricing in first-tier cities is holding up quite well, but there has been some oversupply in tier-two and tier-three cities. However, the cap rate expansion has not been that large, perhaps 25 basis points.”

Chen adds: “There is still a lot of interest in logistics. But the pricing realized in early 2022 could represent the peak, and it would be quite hard for investors to match that price in the near future.”

Data from broker CBRE shows logistics yields for tier-one cities were steady in 2022, but yields widened for office and retail properties.

China’s REIT revolution

The success of the new real estate investment trust sector is a boost for managers and investors.

“The C-REIT is huge, it is a revolution for the market,” says LaSalle Investment Management’s Winnie Yu.

After a long period of gestation and a number of trial runs, Chinese real estate investment trusts launched in 2021. Unlike REITs elsewhere, they are debt vehicles backed by commercial real estate in a limited number of sectors, such as infrastructure, logistics and multifamily. “This has been close to 20 years in the making,” says Funlive’s Keith Chan.

A total of 24 have now been launched, many of them hundreds of times oversubscribed. A number of real estate managers have launched C-REITs, including DNE Group, which raised more than 1.5 billion yuan ($220 million; €207 million) for a REIT backed by a portfolio of high-tech manufacturing workshops.

DNE’s Martin Chen says the development is widening interest in real estate: “We see public market investors are interested in launching pre-REIT funds to acquire mature assets which can become a C-REIT and we expect this to be a significant trend in future.”

While REITs have been launched in a number of sectors, Chen suggests the most successful will be for sectors that otherwise lack liquidity. “There is already plenty of liquidity for logistics, so the C-REIT premium is not significant. However, for other sectors such as manufacturing or multifamily the exit premium to a C-REIT is quite significant.”

Cold storage is becoming an increasingly important part of logistics for investors in the sector, such as LaSalle and DNE. As China’s society has become more affluent in recent years, so consumer demand for fresh food with greater variety, quality, nutrition and taste has risen significantly. The pandemic and the rise in food delivery services have accelerated that trend.

Investors in China often say that going along with the wishes of the government is a good way to be successful. As such, the Chinese government’s support for the multifamily residential sector has encouraged investors. Research from CBRE reveals that, while 150 million people live in rented homes in China – more than 10 percent of the population – only 2 percent of housing can be classified as multifamily residential. However, the broker expects increased demand and government support to boost the number of multifamily rental apartments to more than 12 million units by 2030.

Chan says: “Multifamily in China is strongly supported by the government. We have very good fundamentals for first- and second-tier cities, because the population is huge, the migrant population is huge and residential prices are high. Also, the institutionalization of the sector is underway, meaning greater interest from both global and domestic investors and trading in completed assets.”

C-REITs are go

The launch of the first C-REITs backed by multifamily assets this year was an important step for the sector and has contributed to its increased institutionalization.

A telling sign of how real estate has changed in China, as elsewhere, is the lack of conversation about the office and retail sectors. Both are expected to see some recovery once China has shaken off covid, but our panel had little enthusiasm for either, even though there may be opportunities. “There is price pressure in the office sector, but not many transactions,” says Chen.

Meanwhile, the hospitality space is also expected to see a recovery, which might spark more transactions. Indeed, in other markets, investors have tended to wait for the pandemic dust to settle before committing to the sector.

Chen, naturally, is keen on so-called new economy sectors such as logistics, life sciences, high-tech manufacturing and data centers, but plays down the potential for life sciences, suggesting it will be a successful niche rather than a scale business. “Life sciences is a small niche sector and a very small investment universe compared with, say, logistics. So, the logistics sector can be a hot asset class for a decade because of sizable investable assets, but life sciences are expected to attract attention for a much shorter period of time.”

He adds: “We see a lot of potential for high-tech manufacturing space, a sector we are involved in, because there is strong demand for it and now with C-REITs there is a viable exit strategy for investors in the space.”

The broadening of the real estate investment market in China is one of the most positive developments of the past 18 months, with the growth of C-REITs and RMB funds a boon for both managers and investors. Even though China real estate has struggled, it has also progressed, the panelists believe, and the evolution of such capital structures is evidence of this.

Further encouragement comes from the Chinese authorities’ changing attitudes towards the real estate sector. For some time, government restrictions such as the infamous ‘three red lines,’ which restricted developers’ ability to use debt, dampened the market and led to widespread distress. However, without much fanfare, a number of support measures were unveiled in late 2022.

These include the lifting of a ban on equity refinancing for listed developers, $162 billion of fresh credit for the sector from state-owned banks, $28 billion of loans to fund housing completions, cutting mortgage rates and deferring payment loans for homebuyers.

Yu says: “There have been a number of changes in the environment, not just the end of zero covid. There has been some relaxation for developers and support for real estate, and the C-REITs have really taken off. We also see some opportunities for mergers between developers as the market stabilizes.”

While the measures are intended primarily to support homebuyers and, secondly, to shore up the big real estate developers which are so crucial to the Chinese economy, the expectation is that they will benefit private equity real estate investors too. China still has problems to negotiate, but changing tack over zero covid and the economy has encouraged its real estate players.

Meet the roundtable

Martin Chen
Chief investment officer
DNE Group

DNE Group is a new economy-focused China real estate investment manager with more than $15 billion under management. Chen joined DNE a year ago from Singapore’s GIC, where he spent nine years in China.



Keith Chan
Chief executive

Funlive is a specialist operator and manager of Chinese multifamily residential, with 18 billion yuan ($2.6 billion; €2.45 billion) under management. Previously with Macquarie Capital, Chan has more than 20 years’ experience in finance and investment.




Winnie Yu
Managing director, logistics, acquisitions and asset management
LaSalle Investment Management

LaSalle has been in China since 2007. Yu joined in 2018, after stints with Tishman Speyer and Morgan Stanley. As of Q2 2022, LaSalle has $82 billion of assets under management globally, of which $13 billion is in Asia-Pacific.