ULI MEMBER–ONLY CONTENT: Real estate investors gathered for a panel at the ULI China Real Estate Investment Summit said they are optimistic about continued opportunities in China across a broadening group of sectors and product types, a position echoed by a second panel featuring Chinese developers. The summit was held in December with both virtual and in-person participants, as well as tours in Shanghai.
Markets have delivered solid fundraising opportunities for developers, said Kara Wang, CitiGroup’s managing director and co-head of real estate investment banking for the Asia Pacific region. “It has been a fantastic year for most of the real estate developers from China in terms of offshore fundraising,” she said.
The bond market provided Chinese developers with opportunities to issue bonds with longer maturation dates at a record-low cost, she noted. With valuations remaining fairly stable, some developers also took the opportunity to deleverage by raising public equity in anticipation of the new “three red lines” financing rules that the Chinese government released in August in an attempt to regulate real estate debt.
From real estate investment trust (REITs) to new market segments, the Chinese real estate landscape is evolving, panelists noted. China’s first REIT was kicked off in April, with a focus on infrastructure projects.
It will take three to five years for REITs to become available to a broader group of sectors, including commercial real estate, said Stanley Ching, senior managing director, managing partner, and head of CITIC Capital Holdings Limited’s real estate group. For now, policymakers “have limited [REITs] to a smaller group of asset classes that they are pretty sure will perform well,” he said. “When the trial period is over, they will feel more comfortable to allow other asset classes to be included.”
China’s new REIT is a sign of the market’s evolution, the panelists said. Ellen Ng, managing director and head of real estate investment for China at Warburg Pincus, said the market is still dominated by residential developers. “As a result, . . . many other market segments are underserved … underdeveloped,” she said.
Ng said she is beginning to see developers branch out into new product types and that ample potential exists in new-economy real estate segments like logistics, data centers, specialized information technology parks, and rental apartments. All are underpinned by what Ng called fairly healthy demand trends, which she sees continuing for the next several years.
Chinese institutional investors, for their part, have an appetite for new products and approaches, but they are still cautious, and investment in newer products like logistics and data centers is still somewhat limited, Ching said. Chinese institutional investors are “very different from what we have experienced with global institutional investors. Be prepared, be patient, and make sure you’ve got good assets to be injected into whatever capital you want to raise,” he advised.
In terms of overseas capital, Ng confirmed that substantial institutional demand exists for real estate investment opportunities in China. (ULI’s Emerging Trends in Real Estate® Asia Pacific 2020 noted that Shanghai was the fourth-most-liquid city in the world in 2020, and second only to Tokyo in Asia).
“First, most offshore institutional investors are still underallocated in Asia in general and particularly in China,” she said. “Secondly, obviously China is one of very few somewhat functioning markets available.”
Third, she noted, with regulation of local fundraising and shadow banking tightening, more opportunities for international players are opening up that did not exist even five years ago. International insurers and pension funds are seeking more exposure in China, a trend of the past few years that she sees as promising, along with the debut of China’s new REIT.
“As the ecosystem continues to mature and develop, we’re seeing much more varied and much more dynamic flows of capital at play,” she said.
The three red lines present new imperatives for developers and opportunities for investors, the panelists said. Especially in China, domestic regulations play a significant role in shaping the market. Wang noted that the three red lines are “a sudden new rule that’s very specific,” and that because they limit the ability of developers to access debt, they “create quite a bit of opportunity for [investors] on the private side.” As a result, Wang expects private equity to play a more proactive role as developers seek to alleviate pressure on their balance sheets.
The rules take effect in 2023, but in anticipation, 2020 was the first year in which Wang said she saw developers disposing of or seeking capital partners for properties in tier 1 urban areas rather than cities in tier 2 and below. “This is the first time I’ve been hearing so many developers talking about ‘I have a great project in a good part of Shanghai. Can find you someone for that?’”
For developers, opportunities still vary across those tiers, Chinese commercial and residential developers said during a second discussion, moderated by Yingpei Wang, chief investment officer and fund general manager at D&J China. The pandemic has brought massive shocks, but the speed of recovery has boosted business confidence, the panelists agreed.
Commercial properties still offer good opportunities, although those are not evenly distributed across all urban areas, and the recovery is more advanced in tier 1 and 2 cities, noted Liye Ding, chairman and founder of SCPG. Assets in tier 3 and 4 cities tend to be harder to exit than their counterparts in the largest, most developed urban areas, he said.
The pandemic has also shifted consumer preferences, moving some online, and it has changed the way households relate to residential real estate. Real estate must evolve to survive, panelists said.
Months of confinement at home has led many Chinese to rethink their housing situation and “residential functions,” and demand for residential has since increased, said Feng Lin, chief executive officer at CIFI Group. The overall transaction volume remains solidly higher than in 2019, with tier 1 and 2 cities seeing the greatest increase in demand, Lin said. Similarly, household consumption is seeing an increase.
In the future, commercial real estate will increasingly target segmented communities divided by age and preferences, especially as a new generation of tech-savvy Chinese consumers comes of age, predicted Charles Chan, chief executive officer of commercial management at China CapitaLand. In this spirit, Ding noted that his most recent project, a Shanghai mall that opened in late August, is an “immersive, experiential shopping mall,” emblematic of the need to continue adapting to the new preferences of young consumers. “In this way, we can survive,” he said.
According to Bloomberg News, economists and other analysts are carefully watching China’s housing market for signs of a price correction. As speakers on both panels noted, China’s real estate market is still relatively young, and it is evolving quickly.
“I came to Beijing/Shanghai more than 20 years ago. At that time, the real estate industry was nonexistent. It’s quite different from today,” said Henry Cheng, chief executive officer and executive director of Chongbang Group. “There is a lot to be done.” Cheng is a ULI Trustee and was ULI Mainland China’s first chairman.