Investors continue to flock to China's Alpha and Tier 1 cities due to their more attractive supply/demand dynamics, a wide diversity of office sector demand, large consumer bases and more consistent absorption and rental appreciation than in Tier 1.5 and Tier 2 cities. In the China60, the focus continues to be on development rather than standing asset investment. Over the medium term however, changes in the investment landscape (including financial and SOE reforms, improving transparency, more investment-grade stock and less strata-titling) will pave the way for structurally higher transaction volumes and increase buying opportunities for both domestic and international investors.
Overall commercial real estate investment volumes have continued to grow in Mainland China over the past three years, reaching an historical high of US$25 billion in 2013. However, the investment market has displayed increasing volatility over this period, with slower economic growth coupled with low yields (by global standards) dampening investor confidence. Transaction volumes were less robust in 2014, falling to US$19 billion. Nevertheless, JLL is optimistic that the investment market will maintain strong growth over the medium to long term as greater transparency, more tradable investment-grade stock and lower risk catalyse investment demand.
The office sector has held its place as the most important sector for investment over the past three years, accounting for around half of total transaction volumes each year from 2012-2014. Office investments are viewed as the most transparent and simple to execute and will continue to attract high levels of demand.
In the retail sector, investors have been cautious over the past year, due to the continuing growth of new supply pipelines. Signs of increased flexibility from sellers should mean that investors with strong retail backgrounds, who have the expertise to take on leasing risk or carry out tenant-mix upgrades, will be able to find opportunities to enter this market over the next few years. A core-plus strategy offers more opportunities than a core strategy, as stabilised assets remain extremely rare.
Meanwhile, logistics has become the hottest sector for potential investors, and we have seen a flood of new capital from institutional investors looking to tap into the sector's growth. As tradable assets are limited, investment has come in the form of equity investments in developers that have access to land in key markets. During 2013-2014, around US$7 billion of capital was committed by institutional players and private equity funds to logistics developers in China (such as GLP, Goodman and Prologis) in order to fund future development.
As China and its real estate sector enter a period of slower but more stable growth, we expect that the commercial investment market will experience sustained expansion and begin to catch up with similar-sized economies in terms of commercial transaction volumes.
Several key changes in the investment landscape will pave the way for structurally higher transaction volumes and abundant opportunities for both domestic and international investors:
In a period of slower growth, maximising the value of existing built stock will become more of a priority, and the focus for commercial real estate will shift more towards investment instead of just development.
Financial sector reform should support stronger transaction volumes and make it easier for foreign investors to access the market, while the introduction of Chinese REITs will lead to more consolidated ownership and a new exit strategy for developers and owners.
For many developers, strata-titling is now a less attractive strategy than it was a few years ago. As a result, more assets will eventually trade en-bloc, and adding value or refurbishing whole properties will become easier.
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