The attractions of China to global real estate investors have remained constant since the market was first opened to them. The nation’s sheer scale coupled with unprecedented urbanization and strong GDP growth created a perfect storm for investors. China’s investment in infrastructure has been a fundamental driver of growth.
China has spent trillions of dollars to build the power generation capacity and transport network required of a developed nation in order to underpin the economic development that has seen hundreds of millions of people move from rural areas to the country’s cities.he attractions of China to global real estate investors have remained constant since the market was first opened to them. The nation’s sheer scale coupled with unprecedented urbanization and strong GDP growth created a perfect storm for investors. China’s investment in infrastructure has been a fundamental driver of growth.
The data for urbanization in China are dizzying: 500 million people have moved to cities over the past 35 years. By 2035, when the urbanization rate is predicted to hit 70 percent, nearly 1 billion people will live in China’s cities. Urbanization creates demand for real estate space for the new urban population and the jobs they undertake.
Harry Tan, head of research, Asia-Pacific at investment manager Nuveen, says: “Beijing, Shanghai, Guangzhou and Shenzhen are among the cities that are best positioned to benefit from the structural demographic uplift in the coming decades. However, from an urbanization, affluence and consumption angle, all Tier 1 and 2 cities will continue to attract immigrants, resulting in an expansion of the services sector and deepening the labor market skill pool.”
Urbanization in China is complicated by the hukou system of residency permits. These permits determine a person’s right to receive certain benefits, such as agricultural land in the case of rural hukou, and access to government jobs, subsidized housing, education and healthcare.
Migrant workers can be granted an urban hukou as long as they fulfill certain criteria. These include level of educational qualification, technical expertise and entrepreneurship, for example. The process is more complicated in larger cities where the labor market is highly competitive. To further complicate matters, some rural migrants to large cities wish to retain their home hukou and the land rights that accompany it.
Megan Walters, global head of research at investment manager Allianz Real Estate, says: “Real estate investors in China should pay close attention to government policy, particularly around the changes to the hukou system. There is a range of reforms and local experiments in cities to relax the system and allow greater urbanization.”
China’s first-tier cities, Shanghai, Beijing, Shenzhen and Guangzhou, have adopted a points-based system for hukou applicants, who will be scored on factors such as employment sector and academic achievement. These are not consistent across cities. For example, Shanghai is under population pressure and the city authorities are keen to stay under 25 million people while encouraging growth in satellite cities.
Meanwhile, second-tier cities have adapted their systems to attract graduates. Chengdu in western China allows all university graduates to apply for the city’s hukou before they find a job, while Wuhan permits all workers who graduated within three years to apply for its hukou.
Last year, a relaxation of the hukou system was announced for a range of smaller second- and third-tier cities, including Xi’an, Harbin, Changchun, Taiyuan, Nanning, Dongguan, Suzhou, Hefei, Jinan, Qingdao, Dalian, Xiamen, Ningbo, Kunming, Shijiazhuang, Nanchang and Fuzhou.
Walters says: “These smaller cities are not usually on the radar of international real estate investors. However, now may be the time to start to look at these more closely, particularly those which are within the mega-city clusters, for example Wuxi, Hefei, and Suzhou.”
China’s mega-city clusters are the latest development in its innovation story. These giant urban agglomerations contain a mix of large and small cities linked by high-speed rail networks. There are three main city clusters that are expected to be a focus of GDP growth. The mega-city clusters have nation-sized populations and wealth and are larger than similar areas elsewhere, such as the Tokyo Bay Area.
In a centrally planned economy, the development of the clusters is not being left to the market. China’s planners hope different cities in each region will focus on their own comparative advantages so that duplication is avoided, areas complement each other and synergies are maximized. Hong Kong, in the Greater Bay Area, is focused on international finance and trade, while neighboring Shenzhen is an innovation hotbed and center for domestic financial liberalization.
Walters says: “The three mega-city clusters will be of considerable interest to investors. Along with relaxation and reform of the hukou system, further reforms will relax foreign investment rules and restrictions on foreign companies setting up shop, for example in financial services.”
Another factor that bodes well for the future of smaller cities within clusters is the reduction in transport time, which is expected to encourage decentralization. In the Greater Bay Area, Guangzhou is linked to neighboring Foshan by subway, making the smaller city an ideal overspill site for office developments or for residential developments for commuters. In Hong Kong, where housing costs are among the highest in the world, it has been suggested that some workers might prefer to relocate to the GBA, where property is more affordable, and still be in commuting distance of the territory.
China’s infrastructure investment has been focused on transport links such as its high-speed rail network, and new airports such as Beijing Daxing. However, it is also developing a digital infrastructure and creating smart cities for the next stage of its development. Nuveen’s Tan says: “Smart cities will change the use of real estate over time. Beijing, Shanghai, Guangzhou and Hangzhou are the leading smart cities in China.
“Guangzhou is arguably spearheading China’s innovation and start-up movement. The city is developing tech and innovation capabilities through various ambitious projects. For instance, construction is currently underway for the Sino-Singapore Guangzhou Knowledge City, which will comprise hi-tech business parks, commercial and public amenities, and housing for 500,000 residents.”
Walters adds: “China has a separate digital ecosystem running on a parallel path to the West, and in many instances is in the lead. China is strong on mobile phone payment systems and also the rollout of 5G networks. 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.”
China’s burgeoning digital economy is having a direct effect on real estate markets. Broker JLL reports demand for grade A office space by tech firms in second-tier cities will have doubled between 2016 and the 2020 year-end.
As well as digital infrastructure, China is building more sustainability into its cities, says Richard Hamilton-Grey, director of sustainability, Europe and APAC, at Nuveen. “China is firmly positioned on the world stage as a renewable energy powerhouse – it is the world’s biggest manufacturer of solar panels and wind turbines and has the world’s largest hydro-power production capacity.
“However, China’s rate of urbanization has led to questions being raised over the pollution, sustainability and quality of life of its cities. The government-led ‘eco-cities’ program has helped boost green transformation at the city level, with Shenzhen now broadly recognized as China’s most sustainable city, having established its ‘eco city’ program in 2005. Shenzhen has plans to go further, announcing a 1.2-kilometer elevated sky garden to be built in the Qianhai district that will connect the waterfront with the town center and public transit.”
Last year, China announced a plan to make Shenzhen a global leader in terms of innovation, public service and environmental protection by 2025, as well as making it the ‘big data’ center for the Greater Bay Area. The plan even contained hints of political and financial reform, as well as environmental innovations.
The most pressing environmental issue for most Chinese city dwellers is air quality. For real estate investors this is also an area where performance is measurable, making progress easier than with other environmental, social and governance factors.
Hamilton-Grey says: “Air quality continues to be a focus for
multinational companies looking to take space in China’s cities, so the ability to curb the impact of air pollution and improve the quality of life for residents will be a key factor in driving real estate demand.” n
China’s mega-city clusters
Greater Bay Area: This consists of 11 cities in the Pearl River Delta in southern China. The largest cities are Guangzhou, Shenzhen and Hong Kong, which are now connected by a high-speed rail network that has cut travel times dramatically. The GBA has a population of more than 68 million and GDP of 10.5 trillion yuan ($1.5 trillion; €1.35 trillion).
Yangtze River Delta: This eastern seaboard region includes Shanghai, as well as Hangzhou (home of tech giant Alibaba), Nanjing and a host of smaller cities. The cities will be linked by new transport infrastructure aimed at creating a 90-minute commuting circle to Shanghai. The area comprises 26 cities, a population of 222 million and GDP of 17.7 trillion yuan.
Jing Jin Ji: This 13-city cluster includes the capital Beijing, the busy port of Tianjin and a new city named Xiong’an, which is being built between the two. Xiong’an has been designated a smart and green city, and will benefit from some state functions being relocated from Beijing. Harry Tan, head of APAC research at Nuveen, says: “Beijing has committed more than 200 billion yuan to 300 key projects focused on infrastructure, such as the railways connecting to the
new Daxing Airport.”
A further 16 city clusters are being developed all over China.