China property market transactions expected to reach 260 billion yuan by 2020; high-potential market to represent 36% of new transactions

CBRE publishes whitepaper "Towards 2020: China Investment Strategy"

Shanghai, June 20 – According to CBRE in their recent-published whitepaper entitled "Towards 2020: China Investment Strategy", the transaction volume of Chinese Commercial Real Estate (CRE) market is expected to reach RMB 260 billion by 2020, a 45% increase from 2016, underlining huge investment potential in the real estate market.

Although China’s investable commercial real estate was valued at USD 3.4 trillion in 2016, the second highest in the world, the country’s Transaction Activeness Ratio (TAR) remains relatively low. Along with other BRIC countries, China is still currently in the low-liquidity phase. With its investment market continuing to mature, the market is projected to shift into medium-liquidity phase around 2025. 

Figure: TAR* of major countries 

Note: Transaction Activeness Ratio (TAR) refers to the ratio of annual investment transaction to investable real estate value*100, which can be quoted as an indicator of market liquidity.  
Source: CBRE Global Investors, RCA, CBRE Research, Q2 2017

On the city level, Beijing and Shanghai take lead in terms of transaction volume and activeness in China, while also catching up with other major markets in APAC. For example, Shanghai’s en-bloc investments surpassed Hong Kong and Singapore during 2014-2016.

CBRE predicts that Beijing and Shanghai, the two gateway cities, will represent 60% of China’s CRE transaction volume in 2020. Six high-potential markets in China, including Guangzhou, Shenzhen, Chengdu, Chongqing, Tianjin and Wuhan, are forecast to account for 36% of additional transaction volume.  

RMB 1 trillion available for China CRE investment in the coming four years

By the end of 2016, Chinese institutional investors’ capital allocation to prime office space amounted to nearly 1% of total prime office stock of 17 major cities. CBRE believes that more domestic institutional investors will look towards commercial real estate during the period 2017-2020 as a smart addition to their investment portfolio. Major investors, including insurance companies, real estate PE funds, developers, and cross-border investors, are projected to make RMB 1 trillion in capital available for deployment in the coming four years. 

Source of capital:
- Domestic institutional investors led by insurance companies and real estate PE funds are expected to become the major source of CRE investment
- Developers are increasingly shifting focus from development to investment properties
- Cross-border investors continue to be a stable source of capital in China’s CRE investment market.

China Commercial Real Estate Investment Outlook 
Based on each market’s tertiary value-added per capita and current CRE development, the study in the report categorized 286 Chinese real estate markets into infancy phase, growth phase and maturity phase. The analysis also indicated that the tier one cities are expected to enter stability phase around 2035. 

Figure: Commercial property development curve
Infancy (170 cities): Limited commercial real estate stock and infrastructure
Typical markets: Luoyang, Beihai, Linyi, Huanggang and Handan 

Growth (112 cities): Active development and improved infrastructure but limited liquidity
Typical markets: Nanjing, Suzhou, Hangzhou, Tianjin, Chengdu, Xiamen, Hefei, Zhengzhou and Xi’an 

Mature (4 cities): Good infrastructure, a large number of investment-grade properties and improving liquidity
Typical markets: Beijing, Shanghai, Guangzhou and Shenzhen

Stability: A substantial and diverse range of investment-grade stock, limited new supply and a highly liquid and transparent market

Figure: CRE investment opportunities in different phases 

Sam Xie, Head of Research, CBRE China, commented,” Looking ahead to 2020, six fundamental drivers – infrastructure, urbanization, the Belt and Road Initiative, the ‘Made in China 2025’ strategy, demographic shifts and consumption upgrade – are expected to shape the commercial property investment strategy. In the next 10-15 years, a growing number of commercial real estate markets will be shifting into maturity phase. Enhanced demand, increased allocations and rising TAR will substantially drive the asset value of prime commercial real estate.”

Alan Li, Managing Director of Capital Markets, CBRE Greater China, said,” The prospects for China’s CRE investment will be very promising as both institutional investors and developers are expected to expand investment in this sector. En-bloc transactions will continue to be active. China, one of the rare few markets whose economy keeps growing at a steady pace, remains one of the top destinations for global asset allocation. Looking ahead to 2020, investors are advised to focus on urban regeneration projects in tier one cities, tap into the shift of high-potential CRE investment markets into maturity phase, and explore new opportunities brought by the establishment of the new special economic zone of Xiong'an New Area and the One Belt One Road initiative. In addition, regulatory and policy support for real estate finance, real estate allocation by enterprise annuity, as well as capital account liberalization signal significant growth potential for CRE investment for longer term.”