International investor appetite for commercial property in China continues to hold up despite global trade tensions and a slowing domestic economy – better still, it looks well placed to continue rising this year, say real estate experts.

Institutional investors drove the demand in 2018, most notably insurance firms, said Sam Xie, head of Greater China research at property services firm CBRE, which expects more of the same this year.

Sam Xie, CBRE

Real estate investment into China’s most important commercial centres – so-called tier-one cities like Beijing, Guangzhou and Shanghai – more than doubled last year to Rmb94.6 billion ($13.9 billion), research by rival Cushman & Wakefield shows. What's more, foreign investment as a percentage of this total jumped to 45% from 25% in 2017, the property services firm added in a report on Tuesday.

A major reason for that has been the credit tightening seen on the Chinese mainland, which has thrown up interesting and diversified opportunities for international participation, Gordon Marsden, head of Asia-Pacific capital markets at Cushman, said in the report.

Lower participation by domestic investors has also played its part as that develeraging drive has shrunk local funding channels and lifted costs.

ROBUST FUND FLOWS 

The appetite for Chinese real estate among foreign asset owners is set to remain robust. Globally, some $20 billion of funds focused on investment into Asian property were raised in the first three quarters of 2018 – a historic high – and a large proportion of that will target China, CBRE’s Xie told AsianInvestor.

Taking the potential for additional debt funding into account, CBRE estimates that $60 billion is set to be deployed into Asia-Pacific real estate this year, with $35 billion of that targeting Chinese assets.

INVESTMENT INTO TIER 1 CHINESE CITIES, BY CAPITAL SOURCE (2008–2018)
Source: Cushman & Wakefield

Much of the increase in investment volumes last year came from institutional investors rather than developers, Xie said.

Although unable to give a breakdown of these institutional investors by type or origin, he said international insurance firms are clearly a fast-growing source of investment flows into Chinese real estate, whether via funds, co-investment or direct deals.

Such firms start by getting exposure to Chinese real estate via funds but as they get more familiar with the market and as their assets and teams on the ground grow, so a rising number of them are looking to invest in property directly, he added.

Xie declined to identify any of these institutions by name but said foreign real estate investors generally appeared unfazed by the wider trade and economic concerns swirling over China.

“This [demand for mainland property] is more about confidence in the mid- to long-term growth in China,” he said. “Obviously there will be short-term headwinds, such as domestic deleveraging, but [economic] growth of 5.5% to 6% for the coming years is still sufficiently strong to generate promising property investment opportunities.”

SHANGHAI CALLING

With the biggest office and logistics market in China, Shanghai remains the most popular real estate destination for foreign investors, Xie said.

As well as a solid and diversified demand base, Shanghai has the most investable commercial property assets of any Chinese city, which helps to support market liquidity, he added.

The city is also seeing a big inflow of international financial firms opening up shop as the Chinese government slowly enables greater foreign participation and more foreign ownership in its asset management and insurance markets.

While foreign property investors were especially active in the fourth quarter of 2018, accounting for 76.1% of the total investment volumes in Shanghai, domestic investors were largely hesitant, Cushman data shows.

HONG KONG SAGGING

Beijing, Guangzhou and Shenzhen have also been attracting more international real estate capital, unlike Hong Kong, where the commercial property market is showing signs of sagging after a hot patch.

In the fourth quarter, investment volumes into Hong Kong commercial assets with a deal size of over HK$100 million dropped by 77.6% year-on-year to HK$22.1 billion. Still, for 2018 as a whole the city posted total deal volumes of HK$126.3 billion, the second-highest after 2017.

That comes amid talk – voiced by large US asset managers such as BlackRock and Nuveen – that the market has been due a correction.

“In view of growing global uncertainties, we expect commercial property investment volumes [in Hong Kong] to remain muted in [the first half ] 2019,” Brodie said.