Investment

INVESTORS DISPLAY STRONG PURCHASING INTENTIONS

MOST INVESTORS INTEND TO BUY MORE REAL ESTATE THIS YEAR

The pandemic weighed heavily on commercial real estate investment activity in 2020, with transaction volume falling 28% y-o-y to RMB 194.4 billion. However, market sentiment and purchasing activity staged a brisk recovery in H2 2020, and momentum has continued to accelerate in the early weeks of 2021. CBRE expects commercial real estate investment volume to increase by 15-20% y-o-y this year.

CBRE’s 2021 China Investor Intentions Survey uncovered strong buying intentions among China-focused investors. Around 57% of respondents intend to “buy more” real estate in 2021, the highest percentage since the survey began in 2016.

Cross-border activity is expected to pick up this year, underpinned by the significant volume of liquidity created by central banks’ US$8 billion expansion of their balance sheets since the onset of the global pandemic. This has led to high levels of real estate fund-raising activity, with China-related cross-border fund-raising reaching US$17.9 billion in 2020, 23% above the five-year average.

China’s resilient economy and robust occupier demand led 70% of Asia Pacific-based respondents to select it as the market they expect to recover first. 63% of cross-border investors intend to “buy more” high quality real estate in China in 2021.

The survey noted stronger investor intentions on the back of a price correction across major asset classes and a rise in asset availability resulting from deleveraging developers and fund expiries.

LOGISTICS ASSETS WILL REMAIN THE PRIMARY FOCUS

DELEVERAGING AND FUND EXPIRIES PUSH UP ASSET AVAILABILITY

Asset availability is expected to rise in 2021 as domestic developers offload properties to comply with the “three red lines”* regulations. Curbs on real estate loans have added another layer of pressure on overleveraged property owners. As of Q3 2020, 19% of A&H listed developers were still in the red zone, meaning they need to reduce more than RMB 195 billion-worth of interest-bearing debt to meet strict debt level requirements. With this year likely to see more developers disposing of non-core assets and seeking equity financing, investors will enjoy a diverse range of opportunities for asset acquisition and platform investment.

Impending fund expiries will also contribute to a larger pool of assets for sale. Between 2016-2018, major domestic and foreign real estate funds’ (including trusts) cumulative investment in high quality Chinese commercial real estate was just under RMB 180 billion. Based on historical acquisition costs, just 10% of this investment has been disposed of thus far. Considering a holding period of three to five years and extension clauses in fund expiries, the coming years will see more active disposals by funds. As more than 90% of fund-held assets are in Shanghai and Beijing, investors will have opportunities to acquire high quality assets in these two rapidly recovering gateway cities.

LOGISTICS PROPERTIES WILL REMAIN KEENLY SOUGHT AFTER

The impact of measures to contain the pandemic varied significantly across asset classes. Logistics, which has benefitted from structural trends such as the acceleration of online consumption, was the most resilient and is therefore set to remain in favour in 2021.

The large volume of dry powder will also support robust transaction volume in this sector this year. China-related logistics fund raising exceeded US$10.8 billion in 2020, an increase of 139% y-o-y. Further yield compression is likely in 2021.

CBRE advises core investors to focus on stabilised logistics assets in the three major city clusters. Value-added and opportunistic investors seeking higher returns may consider brownfield opportunities like asset enhancement and distressed warehouses/factories arising from manufacturers under financial stress. Platform investment in small and medium size developers with industrial land and project reserves in tier I and surrounding satellite cities is another option.

SHORT WINDOW OF OPPORTUNITY TO ACQUIRE OFFICE AND RETAIL ASSETS

PRICES OF STABILISED GRADE A OFFICES MEET INVESTORS’ EXPECTATIONS

While the relatively successful adoption of mass remote working following the onset of the pandemic caused initial consternation among investors about the future of office demand, the office will continue to play an essential role in fostering innovation, supporting team productivity and enhancing employee engagement. The rapid rebound in office leasing activity in H2 2020 has reassured investors about the outlook for this sector.

More than 60% of respondents to CBRE’s 2021 China Investor Intentions Survey expect a less than 10% discount or no discount for stabilised Grade A office buildings. The capital value correction for Grade A office buildings in core areas of gateway cities reached about 10%-15%7 in 2020, creating a window of opportunity for investors to purchase this asset class and benefit from expected rental growth and yield compression in a cyclical recovery.

RETAIL OFFERS COUNTER CYCLICAL PLAY BACKED BY RENTAL RECOVERY

Retail was among the sectors hardest hit by the pandemic. However, the sector has rebounded quickly, and China’s advanced level of omni-channel retail development and rapid urbanisation are expected to lead to further strong growth in demand for brick-and-mortar retail real estate.

Leasing activity returned to pre-pandemic levels in H2 2020, supported by retailers displaying a solid appetite for expansion along with a rebound in discretionary consumption. Nearly 90% of cities tracked by CBRE expect to achieve rental growth this year. Nationwide retail rents are forecasted to increase by 1.2% in 2021.

CBRE advises investors with operational expertise to increase their capital allocation to the retail sector and focus on regional shopping malls or those with a strong population catchment in tier I and tier II cities, especially assets with potential for renovation and tenant mix improvement.

click to enlarge

Note:
⁷ The change in capital value for Grade A offices in core areas of Beijing and Shanghai is matched by the change in net effective rent and cap rate in Chaoyang CBD in Beijing and Core CBD (West Nanjing Rd, Huaihai Rd and Lujiazui) in Shanghai.

Data Source: CBRE Research, January 2021.

STRUCTURAL TRENDS TO ATTRACT INVESTORS IN 2021

FOCUS ON LONG-TERM DEMOGRAPHIC AND TECHNOLOGICAL SHIFTS

With “dual circulation” adopted as the pathway for China’s economic restructuring, investors are attaching greater importance to domestic consumption and technological innovation when formulating and reshaping investment strategies. Asset classes such as business park offices, data centres and cold storage facilities are attracting greater attention.

The transaction volume of business parks rose by 59% y-o-y in 2020. Assets in tech cities or submarkets with agglomerations of tech companies will be on investors’ radar in 2021, backed by strong demand for such space from TMT companies, which accounted for 32% of office leasing volume last year. Business parks and offices in tech clusters are also outperforming in terms of rental growth.

Respondents to CBRE’s 2021 China Investor Intentions Survey named data centres as their more preferred alternative property sector for a second consecutive year. Demand is set to rise further this year on the back of the launch of 5G, rising online penetration across various industries accelerated by the pandemic, and government support for new infrastructure investment. Total investment volume (including investment in corporate stakes) in China data centres exceeded US$3.68 billion in 2020, up 30% y-o-y.

Platform investment and partnerships with local operators will remain the preferred strategy for investors given the high entry barriers, especially in terms of licensing and operational expertise. Investors may also consider asset acquisition followed by the outsourcing of operations to specialist data centre companies.

Cold storage facilities benefitted greatly from rapid growth in demand for fresh groceries and pharmaceutical products, in what was yet another pandemic-driven trend. China’s cold storage capacity remains limited compared to western markets’, with Global Cold Chain Alliance data showing that cold storage per urban capita in China stood at 0.13 cubic metes in 2018, just 25% of that in the U.S..