Market Movements

When China eased restrictions on its currency and allowed for greater exchange flexibility – surprising the world – the renminbi eventually settled down at a 1.9% loss against the US dollar. Though there are still concerns for the Chinese economy overall, the currency move has spurred real estate activity across the globe. Rumblings of the People’s Bank of China allowing the renminbi to depreciate further (up to 3%) have sent major investors even deeper into real estate as a source of yields, and made Chinese property – at home and abroad – one to watch.

At Home
On the domestic front, Shanghai remains the preferred investment destination for investors at all levels from China, Asia and around the world. For the period between June 2015 and 2016, residential prices on average rose just shy of 9%. In Shanghai they were up 33% and the city’s liquidity keeps it in the spotlight. The overheated Shenzhen has seen the steepest price climbs in China for the period – at nearly 50% – leading to fears that Shenzhen’s market is unsustainable.

But the news in other sectors is more encouraging. Though major institutional players operating in first tier markets are still active, the individual residential sector is currently underpinning the general recovery of PRC real estate.

Among the projects buoying residential sales is the ongoing development of a comprehensive high-speed rail network, a particularly good sign for second and third tier cities.

Outlying suburbs around Beijing, Shanghai and Guangzhou have found buyers who can get to work quickly and the trend bodes well for the likes of Chengdu and Wuhan. Also helping prop up the residential market is a relaxed monetary policy and purchasing restrictions (except in Tier-1 cities) that support sales.

“The expansionary monetary policy as well as policies on home-purchase restrictions and down payment ratios clearly contributed to the housing market turnaround, but perhaps too drastically with some markets, including Shenzhen, Nanjing and Suzhou, overheating as a result,” stated Kenneth Rhee, chief representative for Chinese Mainland at the Urban Land Institute, in the ULI’s Chinese Mainland Real Estate Markets 2016 Survey.

“With the government already imposing restrictive policies to dial back the residential market, how the government further reacts will greatly affect the housing sector.”

Oversupply is another concern for China. As of mid-year, Shenzhen had 16 months worth of inventory to clear, the most of the major Tier-1 cities. In the second tier, Shenyang (20 months), Dalian (18), Xi’an (12) and Kunming (12) led the way.

With the residential sector slowly coming around, offices and retail property still have a way to go. Offices in Beijing (currently leasing at roughly RMB325 per square metre, or HK$35 per square foot), Shanghai (RMB260) and Shenzhen (RMB230) are doing well or remaining stable on the strength of demand from the IT and tech sectors, but secondary locations such as Chengdu (RMB97), Chongqing (RMB100) and Tianjin (RMB140) suffer, again, from oversupply.

Retail is similarly oversupplied across the board. Where Hong Kong suffers dwindling tourist numbers, China simply has too much space to fill.

“The growing e-commerce and ubiquitous use of smartphones has brought fundamental change to the tenant mix of shopping centres and total space required, with the share of merchandise retailers dropping to as low as 15% to 20% in some cases from the traditional 50% or more,” said the ULI survey.

According to the National Bureau of Statistics, online sales are forecast to account for 11% of all retail sales in 2016, representing almost RMB34 million and that number is rising.

And Away
For all the uncertainty at home, Mainland China investors have made their presence known by quickly becoming a major source of capital. Outbound Chinese capital is having an enormous impact on the world, and the trend is unlikely to ease up any time soon.

“In the last year, Chinese companies have invested more than RMB28 billion into Hong Kong properties,” says Oscar Chan, at China Capital Markets for JLL.
“This hunger for Hong Kong real estate shows not only the growing international footprint of many Mainland companies, but also the growing recognition of the value of holding properties valued in different currencies.”

This new international footprint most recently welcomed Wheelock’s One Harbourgate in Kowloon (sold to China Life and Cheung Kei Holdings) for more than $10 billion, in addition to major landmark properties in New York and Sydney.

Hong Kong remains a prime destination and offices remain at the top of the list for prime investment assets.

August research by Knight Frank theorised the recently approved launch of the Shenzhen-Hong Kong Stock Connect (commencing in December) would lead to a further spike in office demand from PRC companies, particularly in Central (and in doing so buoy Hong Kong’s office sector).

By taking relatively smaller office spaces, Chinese firms are influencing how landlords worldwide lease their properties. The only other market factor with as much influence right now is co-working spaces.

China’s overseas activity is being felt in the hospitality industry as well, beyond the number of Chinese travellers heading overseas (nearly 100 million in 2015), but in the US$5 billion investors put into hotels in 2015.

Asia is running contrary to global trends in hotel investment, but US$252 million went to Chinese hotels in the first half of 2016 alone, third only to Japan and Australia.

“As uncertainties continue post-Brexit, investors are beginning to see China as a safe haven. This is supported by the fact that the Mainland has maintained its upward growth momentum while growth in major developed economies has slowed,” said JLL in an August statement.

By the same token, domestic tourism rose 25% in 2015 (international arrivals held steady) and hotel operators and developers are increasingly responding to those figures, with several groups establishing China-focused initiatives; AccorHotels (Sofitel, Novotel) is just one of the latest.

“Chinese companies recognise the significance of the hotel and tourism industries as the global middle class swells, particularly in emerging markets,” said Tony Ryan, managing director of global mergers and acquisitions for JLL Hotels & Hospitality.

“Some Chinese players are aggressively acquiring hotel management companies to establish vertically integrated travel and tourism businesses.”