China, Explained: How to evaluate real estate opportunities in China
A pillar for one of the world’s largest economies, the Chinese real estate market has captured the interest of global investors. Invesco’s Director of Research APAC Real Estate, Catherine Chen shares her insights on how to invest in China’s property market for the coming year.
Q. How has COVID-19 impacted the Chinese real estate market?
Since our last update in October, we continue to see a steady recovery path for the Chinese real estate market. During the first quarter of 2020, investment activities and property transactions stalled but have picked up since Q2. Broadly speaking, Chinese real estate prices have remained resilient without any dramatic declines during the year thanks to efficient containment of COVID-19. Office/retail property underperformed the logistics sector after the suspension of some businesses under city lockdowns and a pre-existing oversupply in the office market. Logistics on the other hand is riding on the tailwind of online retail, thanks to ecommerce’s phenomenal growth, people working from home and changes to consumption behavior. Pricing has been stable for the logistics sector which is also enjoying a slight to moderate increase in rents compared to office and retail where rents have declined.
Q. How do you conduct due diligence on a property? How does your team identify the timing of your real estate investments?
With real estate, we believe physical inspection of the asset is crucial, as well as having a local team to conduct due diligence, evaluate the location and other considerations that require familiarity with the local market. Having an on-the-ground team to conduct on-site inspection has been invaluable, especially during the global pandemic when many countries had travel restrictions. Throughout the year, our team based in Shanghai travelled within China to conduct research and finalize property deals. Since China is a huge and diverse market, we maximize coverage by combining the expertise of both the acquisition and research teams. The acquisition team sources on-the-ground information about property deal flows and feels the “pulse” of the investment market, while the research team provides in-depth insights on macroeconomic and state policies benefitting certain sectors over a longer term. Using both top-down and bottom-up approaches along with analyzing short-term market movements and medium-to-long term trends, we identify those opportunities best suited to deploy our various sources of capital.
In the deal structuring process, we deeply value having the team on the ground who understand how the terms of the deal work, the legal and tax treatment, negotiate with the buyer, and adhere to local practices such as obtaining municipal and state approvals — all crucial to the success of a deal. Our local asset managers also support post-deal arrangements and they are the unsung heroes of our investments when it comes to handling unprecedented events like COVID-19.
Q. What are some recent regulatory and market developments in China’s real estate?
China kicked off a pilot public Real Estate Investment Trust (REIT) program in April 2020 allowing the listing of domestic REITs with a focus on infrastructure projects like highways, airports and logistics facilities. More details are to be announced, but it marks a milestone for property investors by providing another investment channel for institutions and individuals in the future. It is expected to make the property market more liquid and transparent. We expect fund inflows to accelerate, not only from domestic/retail investors but from institutional investors who see how a more liquid market will mark clearer entry and exit points for their investments.
There were stimulus measures in Q1-Q2 of 2020 to spur credit growth, but the government started to slow fiscal spending in Q3 amid a potential economic recovery. Since Q2, credit conditions have trended tighter. In 2021, we expect Chinese property developers to face tighter liquidity conditions than Q3 this year. In fact, the likely normalization of credit conditions may unlock some mispricing of opportunities to institutional investors like us.
Q. What do you see as the opportunities in China real estate for 2021?
In Revisiting the Case for Investing in China Real Estate, we listed logistics as having structural growth and we are exploring opportunities in data centers. Due to COVID-19, more people are staying home so the demand for data centers which facilitates online traffic will likely be strong. We remain near-term cautious on the office and retail sector given the supply risks and headwinds are higher than logistics.
In terms of geographic focus, we continue to favor the core economic hubs in China such as the Jing-Jin-Ji, Yangtze River Delta and the Greater Bay Area regions, where we see deeper liquidity and transparency and strong demand in their property markets.
Despite market uncertainty in 2020Q1, Chinese real estate prices remained relatively resilient. So far, we have not seen a “fire sale” of distressed assets or massive price reductions. In the coming year as credit conditions tighten on the back of a nascent economic recovery, we may see property sellers more willing to ease prices, setting the stage for us to unlock the vast opportunities found in China’s real estate market.
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C2021-01-054
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