Shanghai, Shenzhen, Beijing Lead Prospects in ULI’s China Cities Survey

Shanghai, Shenzhen, and Beijing hold the best prospects for real estate development and investment in Mainland China, according to a new report from ULI Asia Pacific, Chinese Mainland Real Estate Markets 2016: ULI Analysis of City Investment Prospects. Rounding out the list of top cities are Guangzhou, Suzhou, and Nanjing.

The sixth in a series of annual surveys of real estate leaders, the report assesses real estate development and investment prospects in 33 of the largest cities in Mainland China, as well as key asset categories and issues affecting those prospects.

The housing market in most parts of Mainland China has made a robust recovery since last year, thanks to the cancellation of home-purchase restrictions and the central government’s continuing expansionary monetary policy that began in 2014, according to survey respondents.

Government statistics indicate that during the year ended in June 2016, the average price for a new home increased for every city in the survey, with a median annual increase of 8.9 percent. Shenzhen, Xiamen, Shanghai, and certain cities in the Yangtze River Delta posted annual price increases of 20 to 47 percent.

New home inventory fell to a median of just over six months in June, a significant reduction, which portends that prices likely will continue to rise unless the government intervenes. Already in some overheated markets such as Shenzhen, Nanjing, and Suzhou, the government has begun imposing more restrictive policies to dial back the housing market.

Cities near Tier 1 cities that have high-speed railway connectivity, especially in the Yangtze River Delta, have made a strong recovery. For example, Kunshan and Suzhou are quickly evolving into suburbs of Shanghai, and cities near Beijing, Shenzhen, and Guangzhou are increasingly attracting homebuyers from those areas, with travel time reduced to under one hour by high-speed rail or subway, compared with one to two hours by car. Some interviewees even sounded guardedly optimistic about Yujiapu in the Binhai New Area of Tianjin, an often-mentioned symbol of China’s ghost city phenomenon: Yujiapu is now connected to the traditional centers of Tianjin and Beijing via high-speed rail.

Results for office and retail sectors are mixed, however.

Interviewees consider the office markets in Beijing, Shanghai, and Shenzhen to be healthy despite the substantial amount of new supply slated to come on line in the coming years, particularly in Shenzhen and Shanghai, which enjoy strong demand for office space from the information technology and finance sectors. In contrast, most Tier 2 and 3 cities continue to see a severe oversupply.

In cities such as Nanjing and Wuhan with strong economic growth, especially in the IT sector, office markets perform much better than those in other Tier 2 cities, such as Chengdu, Chongqing, Shenyang, Tianjin, and Xi’an. In the case of Shenyang and Dalian, the already severe oversupply of commercial properties continues to be compounded by slow economic growth.

China’s retail sector continues to be hurt by growing online sales and the oversupply of existing and planned shopping centers across the country. The growing popularity of e-commerce is fundamentally changing the tenant mix of shopping centers and total space requirements. Merchandise retailers’ share of space has been declining fast, with some interviewees predicting it will drop to as low as 15 to 20 percent from the traditional 50 percent or more. Many interviewees in both Tier 1 and 2 cities observed department store closings in their cities.

Even the way rent is collected is fundamentally changing: because a growing portion of sales is being completed online after customer visits to stores, landlords increasingly are phasing out the collection of a percentage of sales and instead rely more on base rent.

The level of enthusiasm for the distribution/industrial sector has come down a notch or two since last year. The sector suffers from too much capital chasing investment opportunities and the difficulty of obtaining land, especially in Tier 1 cities. Some interviewees, however, remain optimistic about the future growth of the sector, citing a severe shortage of high-quality warehouse stock.

As for issues affecting development and investment prospects, the central government’s rollback of home-purchase restrictions and the lowering of downpayment ratios have clearly turned the housing market around, perhaps too drastically and too quickly in some cities. As is generally the case in Mainland China, how the government reacts will greatly affect the housing sector.

Other key issues include improvement of the public transportation system, especially in the form of high-speed rail and subway, which is increasingly blurring city boundaries between Tier 1 cities and nearby cities. To deal with the oversupply of commercial properties in most cities, a more flexible government zoning policy that allows developers to reduce space allocation for commercial use appears to be the only practical solution.

Among niche sectors, coworking space has been getting a lot of attention. The number of operators and locations has grown rapidly in the past year, led by the likes of UR Work, founded by former China Vanke executive Mao Daqing, and SOHO China. Also, WeWork, the largest coworking space operator in the United States, opened its first location in Shanghai during the first half of this year and raised equity financing from Chinese investors, including Hony Capital, a major Chinese private equity fund manager. Dynamic economic growth, wealth accumulation, and demographic changes, plus China’s new two-child policy, will create more opportunities for niche sectors, such as senior housing, to take hold.

In terms of livability, Shanghai and Shenzhen are ranked first and second, respectively. Beijing continues to rank in the bottom half, in contrast with its reputation as having a dynamic economy and healthy real estate market. There is no way of getting around the polluted air and traffic congestion. The livability ratings for Dalian and Shenyang dropped the farthest, reflecting the poor economic conditions in these cities and in northeastern China, with no obvious sign of a turnaround.

This year’s survey consisted of a written questionnaire completed by 81 participants, plus more than 40 individual interviews conducted from late June to early August 2016.

Kenneth Rhee is ULI chief representative for Mainland China.