Prices are high but opportunities abound in China’s growing real estate market, especially in its first-tier cities, a panel of experts and investors said at the 2018 ULI Asia Pacific Summit in Hong Kong.

Betty Wong, national head and executive director of capital markets and investment services, China, at Colliers International, provided an introduction to the country’s real estate markets, focusing on Shanghai, Beijing, Shenzhen, Guangzhou, and Chengdu. Over the past three years, investment volumes in these cities have risen 25 percent annually to a total of US$35.4 billion in 2017.

Shanghai is the biggest market, accounting for 48 percent of investment volume, but Chengdu saw year-on-year growth of 500 percent in 2017, said Wong. The growth figures for Guangzhou and Shenzhen were 119 percent and 53 percent, respectively.

“During the last decade, most deals were done through offshore structures, but in 2017, 69 percent of deals were done onshore via either share or asset transfer,” Wong said. “Domestic buyers accounted for 83 percent of the market. If you add Hong Kong and Taiwan, then it is more than 90 percent domestic. Foreign buyers were Singaporean, with 3 percent of the total, from the U.S. with 4 percent, while Europe made up less than 1 percent.”

Investors are increasingly investing in operating businesses and asset management platforms, not just in assets, she said, and they are “expanding their horizons and [looking] at a lot of different alternative investments.”

Sectors of interest to investors are urban redevelopment and rental housing, both of which are supported by the government, Wong noted.

However, the government wants moderate price growth in the for-sale residential sector. James Wong, executive director of Hon Kwok Land Investment, said price caps are being imposed in some cities, and administrative measures are being used to slow the market. “We can sell 200 units but they will only register one of those sales per week, so can you say you have sold those units?” he asked.

The panelists agreed that the biggest constraint on the market is restrictions on credit, particularly on nonbank finance. However, James Wong said banks are still keen to lend to real estate, especially residential, where they can.

Last year was a very good year for both China property sales and China property developers. In 2017, the MSCI China Real Estate Index, which charts the largest listed developers, rose 101 percent, and listed developers acquired a record RMB400 billion of land. However, average loan-to-value ratios for major developers have risen to 78 percent, and there have been signs of housing demand weakening.

Prices in the commercial sector remain high, with Shenzhen prime office yields under 4 percent, said James Wong. Panelists agreed that asset prices are unlikely to fall. “We hope prices correct so we can buy, but we don’t see any sign of this,” said He Jihong, chief investment officer, Ascendas-Singbridge.

However, Betty Wong said capitalization rates would not continue to compress in 2018. “Tier 1 cities will see quite a lot of land supply in the coming months,” she explained.

A survey of the audience revealed that 88.2 percent believe real estate prices will continue to rise in China over the next 12 months, leading Betty Wong to joke that the room “must be full of sellers.”

Demand for high-quality real estate will remain high, said Ryan Botjer, senior managing director and China country head at Tishman Speyer.

“Despite yields at 3.5 to 4 percent for prime assets and high interest rates—meaning negative leverage—the reality is that there is still a lot of capital looking to buy high-quality assets,” he said. “Due to restrictions on outbound capital, there is a lot of capital tied up in China. If you have the right product in the right location and connected to transport, we still think there is plenty of value in the commercial space.”

Botjer’s views were supported by another major U.S. player in China, James Morrison, senior managing director responsible for development, operations, and real estate services in Hines’s Asia Pacific region, covering China and eastern Asia. Morrison said Hines continues to target prime assets in Shanghai.

“China’s [Tier 1] cities are some of the greatest drivers of innovation and growth of anywhere in the world,” he said. “They are truly alpha cities that are attracting people not just from China, but around the world.”

Asked which sectors would bring the best returns in China over the next few years, panelists offered widespread support for both the residential and logistics sectors. “Residential still works for developers in China because so many people see it as a store of wealth,” said Herman Chui, director, business development (mainland China) at Swire Properties.

Ascendas-Singbridge’s He said she hopes to see China introduce real estate investment trusts because this vehicle would be perfect for business parks, the main activity of Ascendas-Singbridge in China.

James Wong said that while his firm remains invested in the Chinese residential sector, he is keen on the burgeoning data center market. “The data center market is growing 40 percent a year,” he said. “It is going to continue to grow due to demand from the cloud, autonomous vehicles and robotics, and artificial intelligence.”