Enduring fundamentals

Regardless of current events, the fundamental reasons for investing in China real estate have not changed over the past decade. The nation’s great surge of urbanization will continue for a decade and more, creating huge demand for new real estate.

Quickening trends

The upheaval created by the coronavirus outbreak, the US-China trade war and ongoing financial reform is not creating new trends in China. However, it is accelerating burgeoning trends. The rise of logistics, the adoption of flexible working, sustainability and wellness, increased opportunities for overseas investors and the importance of technology are all supported by current market circumstances. Megan Walters, global head of research at Allianz Real Estate, says: “For global real estate investors looking to diversify and capture global growth prospects from technology, it is essential to be invested in real estate on the China side of the tech divide.”

City clusters

China has invested and continues to invest billions of dollars in infrastructure. Much of this is aimed at creating clusters of cities linked by high-speed rail and which benefit from each other’s comparative advantages. Three mega-city clusters, the Greater Bay Area, the Yangtze River Delta and Jing Jin Ji, will be a major focus for real estate investment. Smaller cities in these clusters may offer the best opportunities.

Financial reforms

For several years, China’s regulators have been attempting to make the economy more stable by restricting non-bank finance and high-risk investments. This has hit some overleveraged firms, including real estate developers, and acted as a brake on overseas investment. However, the travails of domestic property owners have allowed more space for overseas capital. Further government reforms are opening up China’s financial markets.

Trade war

The trade war between China and the US has hit exports and GDP growth and has accelerated manufacturing moving from China to South-East Asia. For real estate investors, the change frees up former industrial space which can be converted to higher and better use. However, David Kim, head of private funds at ARA Asset Management, says: “China is almost 20 percent of world GDP and far more integrated with the world economy than in 2003. It can’t simply be sidelined and all the manufacturing moved to Vietnam.”

Hong Kong hardship

The world’s most expensive real estate market is under fire: the covid-19 outbreak followed six months of political unrest, and neither development has been good for real estate. Office rents have begun to slide, while retail is losing the gains made when Hong Kong became the first choice for Chinese shoppers. The territory may have to embrace its Chinese future as part of the Greater Bay Area to maintain its status.

Containing the coronavirus

China is paying a heavy economic price in order to contain the covid-19 coronavirus outbreak, which emerged in Wuhan in late 2019. Real estate owners have introduced new hygiene practices, offered rental relief to tenants and in some cases closed malls as shoppers and workers have stayed at home. Stuart Crow, CEO, Asia-Pacific capital markets at broker JLL, said that during February the commercial market had come to “almost a complete halt.”

The real estate industry is pinning its hopes on these measures working, warmer weather killing off the virus and a sharp second-half recovery.