How China’s Real Estate Sector Is Recovering Since the Reversal of “Zero COVID” Policy

On March 15th, four ULI member leaders based in Shanghai, China engaged in a one-hour discussion on how China’s real estate market has been recovering since the Chinese government ended its “zero COVID” policy last December. Unlike most other countries, until late last year, China continued to impose strict restrictions on people’s movement to contain the spread of COVID while most other countries had no longer imposed travel and other restrictions and instead decided to “live” with COVID as COVID’s lethality had waned. The webinar that was streamlined to the ULI Asia Pacific member community was moderated by Wendy Tsai of the Oval Partnership, an architecture firm headquartered in Hong Kong.

At the start of the webinar, James Macdonald, Savills’ China head of research, shared some statistics on signs of economic recovery since China’s reopening. He pointed out the consensus forecast by international investment banks for China’s GDP growth rate for 2023 has increased to 5.2 percent compared to 4.5 percent by the end of last year. He also pointed out that while most of the world is facing high inflationary pressures, China is experiencing a low inflation rate of 2 percent, considerably lower than around 6 percent in the United States. While most other countries have been raising interest rates to bring down inflation, China has been moderately reducing interest rates to increase lending and stimulate the economy. Despite stable or falling interest rates, last year companies and individuals were in general reluctant to take on more debt due to the uncertainty created by the COVID situation and geopolitical conflicts; however, in the past two months, there have been signs that companies and individuals are more willing to borrow, indicating they are more optimistic about the future. This turn-around is further supported by a recent increase in PMI.

Nonetheless, Macdonald pointed out that the Chinese economy faces formidable challenges such as social stability and youth unemployment. Last year, unemployment levels for the 16-to-25 years-old segment of the population nearly reached 20 percent, one of the highest levels on record for China. To create jobs especially for approximately 11 million new university graduates each year, the Chinese government has set a target to create over 12 million new jobs.

As evidence of recovering economic activities, Macdonald pointed out that domestic flights have almost recovered to the level before the lockdowns of Shanghai and Beijing in the second quarter of 2022. In January, China saw 40 million people taking domestic flights, slightly down from the same time in 2019 and up around 30 percent from the last two years. Subway ridership has also rebounded strongly in all major cities in China. Footfalls in shopping centers in major centers have also significantly increased since the reopening.

Wilson Chen, senior managing director and the head of China at Tishman Speyer, commented that the recent announcement by the newly appointed Premier Li Qiang to support reform and opening to the world is positive news. As for prospects for different property sectors, Wilson said that in the first two months of the year the first-tier cities in China such as Shanghai and Beijing saw strong new home sales. However, he also noted that the housing market in second or lower tier cities may continue to face pressures from completion and delivery risk due to the poor liquidity of Chinese developers, as demonstrated by recent defaults on foreign bonds by several leading private developers, and overall lack of consumer confidence. For office sector, high-end office buildings in transit-oriented mixed-use projects in Tier 1 cities such as Shanghai and Beijing have fared considerably better. He shared that two Tishman Speyer office projects in Shanghai are maintaining 99 percent occupancy rate.

Stuart Mercier, Asia head of real estate investment at Brookfield, echoed Macdonald and Chen’s views and shared that the so-called “revenge” spending has been strong since the reopening with its impact percolating to traffic, sales, and occupancy data of his firm’s portfolio, primarily in Shanghai. He also shared that “like many things in China, there is no one story that dictates the average.” More specifically, he pointed out that there has been a divergence between top tier cities, namely Shanghai, Beijing, Shenzhen, and Guangzhou with a strong middle class with a very healthy family balance sheet and the power and desire to consume, and lower tier cities that are slower to recover. According to Mercier, the household balance sheet in China is in a “spectacular shape” due to unprecedented savings caused by limited spendings during the last three years of COVID. However, how strongly the Chinese economy recovers in the medium term will largely depend on how confident people feel about the pace of the overall economic recovery.

Ervin Yeo, CEO of Commercial Management for CapitaLand China, said, “China is a huge country, so you can pick on any specific data point and draw a story from it. There really is no true average.” He shared that in the past three years, the restrictions imposed in response to COVID has led to different life-style habits, with different cities and locations having different experiences. This has helped to shape the respective pace of recovery. For CapitaLand, Suzhou, near Shanghai, was the fastest recovering market. Due to travel restrictions over the past 3 years, Suzhou’s residents found it more inconvenient to travel to Shanghai to shop, which naturally led people to shop more in local shopping centers. He shared an anecdote of how in November 2022 just prior to the reversal of the Zero COVID policy, Shake Shack opened its first outlet in Suzhou and achieved a double record for the brand: highest ever global opening day sales, and highest ever global single day sales. Overall, neighborhood shopping centers in China performed better during COVID, similar to Singapore where CapitaLand has many neighborhood shopping centers.

According to Yeo, since the reopening, consumers have begun venturing out to more centrally located shopping centers. CapitaLand’s landmark 9 Raffles City projects located in the urban core of their respective cities have seen substantial increases in footfall and sales, also thanks to increases in domestic tourism. He expects retail sales of urban core shopping centers to continue to recover as the number of inbound international visitors increase as visa services resume and more flights are made available.

When asked about how the office sector has been performing since the reopening, Wilson Chen sounded an optimistic note for high-quality office buildings in Tier 1 cities and explained that China’s predominant working culture is that employees prefer to show up to work each working day. As a result of COVID, the quality of indoor workspace has become more important with tenants focusing more on air-quality and preferring buildings with outdoor areas for breaks. Also, over the past three years, tenants have come to appreciate the importance of high-quality building management.

When asked about prospects for the housing sector, Stuart Mercier responded that like in many other countries, housing affordability is a challenge in China. While there continues to be a strong demand for housing, he explained, “the younger workforce is a bit more agnostic in terms of how quickly they put themselves on the property ladder and buy their first apartment.” With the younger urban population preferring to stay close to work and their social network, there is a “great opportunity to build a high-quality institutional level multifamily portfolio.”

When asked about his view on the Chinese economy’s prospects, Mercier replied that he was optimistic for 2023, in no small part due to the reported household net savings of 22 trillion renminbi, which is 5 times the previous record. For the medium term, he cautioned that there needs to be a continued rebound in economic confidence, further reforms, and greater inbound investment, especially from the private sector.

Ervin Yeo commented that, unlike the past three years, all parties were now “fully aligned” to encourage strong footfalls and support domestic consumption. He shared that shopping centers in popular “Wang Hong” (网红, literally meaning, popular on the Internet) cities such as Changsha, Chongqing, and Chengdu that attract large numbers of domestic tourists have been recovering particularly well. Per-customer spending in restaurants has increased with people willing to spend more on meals as they reconnect with friends and family after three years of limited contact.

Yeo explained that CapitaLand has confidence in China’s economy in the long run. Even if China’s economy grows at a moderate annual growth rate, Yao explained China’s economy would be too large to ignore.

Based in Shanghai, KEN RHEE is senior director of ULI China.