China’s property crisis: commercial sector is bucking the trend - South China Morning Post

Moreover, while the housing market is contracting, the commercial property sector continues to grow and is performing strongly. China’s hotel industry, which has benefited hugely from the strength of domestic tourism, is a case in point.

With air traffic within the country having surged to 116 per cent of 2019 levels, according to data from JPMorgan, average hotel occupancy rates in Beijing and Shanghai last month were 15 to 20 per cent higher than in July 2019, data from STR shows.

02:17

Thousands of tourists flock to China’s Great Wall during ‘golden week’, as travel numbers rebound

In Sanya, revenue per available room – the industry’s favoured performance measure – last month was nearly twice the level in July 2019. “Despite the headwinds, the hotel industry has experienced a strong recovery,” said Xander Nijnens, head of advisory and asset management in the Asia-Pacific hotels and hospitality group at JLL.

In the office market, a “ flight to quality” has taken hold. Although average nationwide rental values continue to decline, partly because of hefty supply, average rents for the best-in-class buildings in Shanghai’s central business district rose slightly during the past year, according to CBRE.

In retail real estate, the food and beverage sector is booming following the reopening of the economy, accounting for more than 40 per cent of new store openings in major Tier 1 and 2 cities last quarter, according to CBRE.

However, it is the segments of the commercial market closely aligned with Beijing’s policy priorities – boosting cutting-edge manufacturing, investing in technological innovation, accelerating the deployment of renewables and developing rental housing – that are performing best and attracting significant interest from investors.

Tellingly, CBRE’s breakdown of Chinese commercial property transaction volumes by sector includes a new category – “new economy” – that groups logistics properties, business parks, data centres and cold storage facilities.

Tech-enabled real estate is a major theme in property markets the world over, but it has a strong geopolitical dimension in China because of the government’s self-sufficiency drive aimed at turning the country into a technological superpower.

Shanghai unlikely to lower guard despite Beijing’s property easing policies

The combination of strong demand and an acute shortage of investible assets underpins the strong fundamentals of “new economy” real estate.

Life sciences and business parks have emerged as sought-after properties. Rental growth at Shanghai’s Zhangjiang Hi-Tech Park and Beijing’s Zhongguancun Life Science Park has proved resilient thanks to the high premium placed on longer-term leases for high-quality research and development (R&D) space.

“China is trying to create its own R&D ecosystem,” said Henry Chin, head of Asia-Pacific research at CBRE. “There’s a strong correlation between the performance of science parks and the strategic ambitions of the government.”

The boom in electric vehicle (EV) sales is contributing to strong leasing activity. BloombergNEF expects China to account for 60 per cent of the world’s new EV sales this year, while HSBC notes that Chinese brands account for half of all EVs sold globally. In Shanghai’s business park market, the EV sector occupies 16 per cent of the total leased area, compared with 22 per cent for the life sciences industry, according to JLL data.

The Tesla Gigafactory in Shanghai is seen on June 15, 2022. The electric vehicle sector accounts for a significant part of Shanghai’s business park market. Photo: Bloomberg

Even in the residential market, there are bright spots. The institutionalisation of the rental housing market – a key driver of real estate investment activity globally – is benefiting from the liquidity crisis faced by developers, allowing specialist operators and large investors to acquire attractive projects at steep discounts.

The combination of demographic shifts and changes in lifestyle preferences, supportive government policies, and an underdeveloped market offering huge scope for growth, is attracting investment from major domestic and foreign groups.

Moreover, the institutionalisation of China’s rental apartment sector coincides with the financialisation of real estate as regulators widen the range of “Reit-able” assets to include traditional types of property, bringing China closer to a conventional listed Reit market.

In a report published in May, S&P Global Ratings said China’s infrastructure-focused Reit market – which includes affordable rental housing trusts – could “create a virtuous circle” by providing institutional investors with “high quality and stable income”. Tammy Tang, managing director, China, at Colliers in Shanghai, said the establishment of a Reit market was “a game-changer for the industry, with valuations based on income performance”.

The prospects for China’s housing market are undeniably bleak. Yet, the strong performance and bright outlook for parts of the commercial property market inspire confidence. A discriminating assessment of Chinese real estate has never been more important.

Nicholas Spiro is a partner at Lauressa Advisory

Adblock test (Why?)