LOOK AHEAD 2023: What to expect for China’s property market

Three managers – two domestic, one overseas – give their predictions on what is in store for China’s real estate market in 2023.

As it begins to ease its longstanding zero-covid policy, China remains one of the most closely-watched property markets in the world. PERE recently sat down with three China-focused managers, who shared their big predictions for the country’s real estate market next year.

The new year will have a ‘bumpy’ start 

Overseas investors will continue to take a wait-and-see attitude in beginning of 2023 despite the country relaxing its zero-covid policy. Keith Chan, chief executive officer at Chinese multifamily platform Funlive, called China’s easing of its covid restrictions a “big change” but anticipated the next few months would be challenging for businesses before consumer confidence rebounds. “After the bumpy stage when many people get infected, things will get much better. Then foreign investor sentiment will hopefully get better too,” he explained. Winnie Yu, managing director logistics, acquisitions and asset management, China at LaSalle Investment Management, expected the situation to improve in the second half of next year. “Investors would want to see real economic data before they come back,” she said. Indicators such as improved leasing and demand numbers, a healthier cashflow and reduced debt levels are critical for investors to make any new investment decision.

Logistics pricing will adjust

There will be some level of price adjustment in the logistics sector, despite investor interest remaining high. Martin Chen, chief investment officer at China’s DNE Group, believed investors are becoming more rational in terms of pricing for logistics assets. “The pricing of transactions completed in early 2022 was really the peak that we witnessed in recent years,” he said. Chen thought it would be difficult for any new transaction to reach a higher price level in the near future due to the slowdown of the economy. He was particularly cautious of the oversupply of logistics assets in China’s lower tier cities, while Yu also noted that cap rates had expanded in some of those markets. However, she pointed out the cap rate expansion was not large and could be as small as 25 basis points. “I would not call it a repricing but a fair price adjustment on selective cities,” she said.

Underwriting will become more conservative

Investors have become more selective in terms of location, growth assumptions as well as exit strategies under the current environment, according to Chan. In response, managers are prepared to take a more conservative underwriting approach to provide greater risk protection for their investors. “Even if the growth rate of the rent continues to be 4-5 percent for tier one or some selective tier two cities, we are taking a prudent approach when underwriting different submarket growth rates because you don’t know where the market is trending to,” she said. Apart from more conservative underwriting, Yu believed efficient cost management was also important for strong investment performance. For example, the firm is actively incorporating ESG strategies into its portfolio to reduce the management costs for its assets over the long term.

More firms will tap into domestic capital

More international managers with China exposure are expected to launch their own RMB strategies next year. “When I am talking with market players with similar DNA to LaSalle, they all think we should include certain RMB strategies,” said Yu. With many foreign investors taking a more cautious approach towards Chinese real estate, domestic groups became the most active capital source in the market this year, according to Yu, whose firm hired PGIM Real Estate’s former head of China Matthew Yao last month to lead its RMB strategy. She pointed out that the domestic insurance companies have been very active in pursuing assets with healthy cashflows and sustainable growth in rent. Meanwhile, Chen also predicted domestic capital would continue to dominate in 2023 but believed foreign investors will slowly return to China as the country relaxes its covid restrictions.