Though next year could be a tough one for investors in Chinese real estate, the country’s economy is also more entwined with that of the rest of the world than ever before, speakers said at the 2016 ULI China Mainland Winter Meeting in Shanghai held in December.
The outlook for 2017 is similar to the view from 1997, the year before the Asian financial crisis, and 2007, the year prior to the global financial crisis, said ULI China Mainland chairman Henry Cheng, CEO of retail specialist Chongbang Group. Cheng, originally from Hong Kong, has been based in China Mainland for nearly 25 years, first with Shui On Group and since 2003 with Chongbang, of which he is a cofunder.
The main difference between those times and now is that China has much stronger links to the global economy, potentially making it more vulnerable to outside shocks. He also added, “I have not seen the world so messy in all my 65 years.”
Delphine Yip-Horsfield, chairman and chief design officer of Shanghai-based naked Group, which operates coworking and hospitality businesses, said she has noticed landlords struggling to deal with the effect of e-commerce and changing working patterns. “China’s millennials are entrepreneurial and social media–savvy,” she said. “They want to be excited by their workspace.”
Sustainability is also higher on the agenda than ever before, with pressure coming from both government and customers, said Ryan Botjer senior managing director and China country head at Tishman Speyer. Sustainable is no longer a synonym for green, he noted. “People are much more concerned about wellness, so factors such as air quality, [access to] light, and community are much more important than they have been,” he said.
Cheng noted that sustainability today really refers to adaptability and resilience to changes in the business environment.
The retail sector is particularly vulnerable to rapid changes in shopping habits and the growth of e-commerce, panelists said. “If you look back ten years, the question was, who is doing retail in China? Five years ago you asked instead, who is not doing retail in China?” said Cheng. “In five years’ time we will be asking, who is still doing retail in China?”
Chongbang is dealing with changes in the retail real estate business by increasing the experiential elements at its malls and providing off-line services to online businesses, such as fulfillment centers where customers can pick up, try out, and return their purchases.
Placemaking is becoming increasingly important in China and is a focus for the government, Yip-Horsfield said, but added that she thinks developers are “a bit behind.”
Prices for development sites in tier-one cities have risen sharply this year. In some cases, developable land costs more per square foot than neighboring developed real estate. “The flour costs more than the bread,” said Charles Chan, China chief executive at Ascendas-Singbridge, the Singaporean state-owned developer and fund manager. “What effect will that have on the market in the near future?” he asked.
“There is a lot less land available in tier-one cities, and we are seeing some of the earliest commercial developments beginning to age,” said Botjer, “so there will be a lot more redevelopment in the future.”
An important customer group for Chinese developers will be those in the 45-to-65 age group, Cheng said. “These were the first generation to benefit from the economic development of China since the 1980s—the first generation of affluent Chinese,” he said. He argued that developers will increasingly need to cater to this demographic over the next ten years.