When it comes to commercial real estate investment flows China still takes a back seat in Asia to Japan and Australia, whose markets have better transparency, more experienced investors and deeper inventory. Yet China is also poised to surpass both in the next few years as its economy becomes more service-driven and the investable supply rises, especially in Beijing and the country’s other big top-tier markets, Shanghai and Guangzhou.
So says Anthony Couse, a managing director in Shanghai for global real estate consultancy Jones Lang LaSalle of Chicago. His enthusiasm is apparently shared by the Blackstone Group, reported in April to be planning to raise up to $4 billion for a real estate fund focused on China and Asia. We talked to Couse about where foreign investors can profit as new Communist Party leader Xi Jinping takes power. Excerpts follow:
FORBES ASIA: How has the supply side of the market changed for foreign investors looking at commercial property in China in the past several years?
It’s an evolution — more assets are going to come to market. There is also a difference from three to four years ago, when everyone was focused on tier-one cities. Then tier one became too expensive in their eyes. Everyone went to tier two. Yet tier two is more immature than tier one, and it’s much tougher to really see stable returns. Investors have in the last one to two years come back to tier one. It’s more transparent. Interestingly, we are also seeing some domestic investors selling to foreign, foreign to domestic and international to international. Historically it was all among international investment players playing between themselves.
How have those tier-one markets performed?
On the whole, during the last three years people have made money. The yields during that time have compressed a bit, to around 4.7% to 5.2% net. You could say, “Growth has slowed. The Chinese government is talking about steady, slower growth, and China surely isn’t an attractive place anymore.” It’s quite the opposite, actually. China is increasingly going to become a play for foreign investors .
What assets have good potential to outperform in the next three to five years?
There are three to look at: retail, office and logistics. For retail, there is an emerging middle class. Retail is a recipient of that. I also think the China consumer’s nature and the younger generation’s mind-set have changed from the older generation. Credit has come into play. In Beijing and Shanghai there are some impressive malls on global scale. Ten years ago they weren’t here. Retail is a strong player, but you are dealing with a very different consumer than the office consumer. The Chinese retail consumer is very fickle. There are great returns to be made in retail, but it is the toughest asset class.
What about office space?
Demand in prime cities such as Beijing and Shanghai is phenomenal.
What are the vacancy rates?
In Shanghai, 8%. We had 80% in early 2000 after a supply boom and the Asian financial crisis, and at some point in the cycle that went down to 1%. We’ve come up a little bit. A lot of other hubs are higher. The supply charts in China are often very alarming. But when you look into it, it’s really about demand. In 2011 in Shanghai there was 12 million square feet of office absorption. I think you would struggle to find any city anywhere in the world with anything like that in 2011. Beijing is heavily state-owned [companies] driving in the grade A sector. In Shanghai the finance and insurance sectors have suddenly become players in the grade A sector.
What about logistics?
Logistics is becoming hugely important, obviously encouraged by the government. The e-commerce piece in China is driving a lot of that. What you’re seeing now is investors and developers coming into the market and building state-of-the-art [warehouses] to move goods. This market is very, very undersupplied on quality logistics. It is nowhere near technically advanced enough to cater to demand.
