Our recent report, China60: From Fast Growth to Smart Growth, explores the growth and potential of China’s 60 most dynamic secondary and tertiary cities.
China’s cities undoubtedly face numerous challenges – including environmental degradation and short-term oversupply – but equally, these cities will provide significant investment opportunities over the medium-to-long term as their markets settle down and mature.
Oversupply of commercial real estate is a visible feature in many Chinese cities, but as the country transitions to a new phase in its economic evolution – based on higher-value activities and domestic consumption – demand for high-quality real estate will increase and these cities will gradually absorb this excess supply.
But investors are urged to exercise much greater discipline and robust decision making.
Sought after sectors
Driven by the demands of the rapidly growing e-commerce sector, logistics and retail real estate have come to the fore in the last few years. Warehousing facilities represent the best real estate investment opportunity in China, with a flood of new capital entering the sector as China’s distribution networks expand and modernise. In particular, equity investments in logistics developers, who have access to land in key markets, are rising, with US$7 billion invested into companies such as GLP, Goodman and Prologis in 2013-14 for future development.
As more Chinese consumers migrate online, investors have become cautious about the retail sector and this is further compounded by a huge influx of new malls, which are in development. But some opportunities remain for savvy investors, particularly those with strong retail backgrounds, who have the expertise to take on leasing risk and carry out tenant-mix upgrades.
Economic slowdown, austerity and oversupply has also impacted China’s hospitality sector, especially the luxury segment, and China60 predicts that a period of divestment is likely to follow suit. This will grant investors access to a market which has significant long-term growth potential, particularly in mid-scale hotels.
Demand in the office market will be increasingly centred on nine thriving Tier 1.5 cities (such as Chengdu and Wuhan), driven by domestic businesses, which will rapidly expand. As new Chinese multinationals emerge, they will add business lines and expand their global reach, fuelling demand for high quality space. We will see well located, wholly-owned properties in city centre locations outperform the more supply-saturated new CBD areas.
Although the lack of investable stock is kerbing domestic investment in the short term, foreign investors will increasingly face competition from China’s home-grown companies, which have dedicated real estate teams and ambitious investment strategies. Notable names include Ping An Trust, China Merchants Bank and Gopher Asset Management.
There’s no doubt that China’s changing landscape will offer investors a range of new opportunities as its property market shifts from a development phase towards an investment-led model where maximising the value of the existing built stock becomes more of a priority.
Find out more at JLL’s China60 website.