Investors finding China property tough to unlock
Real estate fund managers in Asia and the US have complained that the reluctance of sellers to drop prices in the face of Covid-19 means that opportunities are scarce in China’s office, retail and residential sectors.
“We would be very cautious. If we made an investment it would have to be value-adjusted and in a very core location,” said Kelvin Wong, managing director at Hong Kong-based real estate investment firm Pamfleet, whose last China deal was an office in Beijing bought at the end of last year.
In the hospitality sector or where offices are not located at central city locations falls of between 20% to 30% are necessary, he reckons. “Currently we don't see sharp adjustments in terms of pricing, in office or retail markets,” said Wong.
New home sale prices in China’s 70 largest cities grew 0.49% in May and 0.42% in April according to the country’s National Bureau of Statistics. Average new home prices in Shanghai increased by 2.6% in the four months to April, according to CEIC Data. Grade A office rents in Shanghai’s central business district fell 0.9% in the first quarter of the year, while grade A office rents at the city periphery were down 2.4%, according to JLL.
James MacDonald, head of China research at property broker Savills in Shanghai, said that activity in all Chinese sectors except logistics had been subdued this year. “The investment market as a whole is pretty quiet at the moment, with buyers looking for discounts but sellers not yet willing to budge much on pricing.”
Global investor flows into Chinese real estate to fell from $13.8 billion in the first quarter of 2019 to $5.4 billion in the same period this year, according to RCA.
Flows from Asian investors into Chinese real estate fell from $11.1 billion to $4.1 billion, even as their allocations to global real estate held steady, reaching $63 billion up from US$63.9 billion. Asian flows into Chinese logistics real estate, however, increased from $0.5 billion to $1.4 billion.
Wong noted that international and domestic firms had slowed their expansion into China as a result of Covid-19 reducing the demand for office space, while supply has continued to increase. He contrasted low vacancy levels in Hong Kong that very rarely fall below 5% with high vacancy levels in the major Chinese cities.
“In Shenzhen and Shanghai they’re around 20%, in Beijing near 10%, in Guangzhou around 5%,” he said.
Robert Johnson, Asia-Pacific real estate portfolio manager at JP Morgan Asset Management, points to an excess supply of new office buildings in a number of non-core or secondary office market locations in Shanghai and Beijing. “There has been a lot of speculative building by developers who don’t have tenants for their new buildings,” he said.
Wong highlights the scarcity of deals beyond Shanghai. “In Beijing, most deals are very rare to trade; they are either priced whole or owned by the government,” he said, adding they were typically large and multi-use developments, including office, retail and hotels, where all elements of the development had to be acquired together and owners were not prepared to sell assets piecemeal.
ILLIQUID AND VOLATILE
David Green-Morgan, Asia-Pacific managing director at RCA, said that Beijing’s office market is less liquid and more tightly held than that of Shanghai which results in more extreme movements in volumes and pricing.
Another issue is that, outside Shanghai, Chinese cities lack a range of investors beyond the government or related companies. That is in contrast to neighbouring Hong Kong, where investors including family offices, institutions, listed companies and private and listed developers.
Dutch pension fund manager APG affirmed its commitment to the multi-family rental sector in China despite the sector seeing no investor flows yet this year, according to RCA.
Graeme Torre, Asia-Pacific head of private real estate at APG, pointed to government policy aimed at improving housing affordability in major cities. “We see the merits of investing with the policy,” he said.
In China, APG concentrates on prime locations in the major cities focusing on building and operating multi-family assets rather than buying them. It partners with US firm Greystar Real Estate Partners in both China and Australia. Torre said that selecting capable operators and developers is very important. “We prefer to achieve yield on cost rather than yield on the value,” he said.
“A number of insurers and pension funds put [real estate allocations] on pause for the first quarter,” said Amir Saleem of bfinance, adding that there were few new manager searches or reinvestments during the period from these groups.
“The pause in private market allocations by this sector could have detrimental effects on long-term portfolios. There is a huge amount of dry powder. It would not be surprising to see a big pick-up [in allocations] when prices adjust.
One challenge for Asian investors is establishing clear valuations. Saleem said that the company had seen a sharp increase in requests from Asian investors for independent verifications via third-party valuers of real estate fund valuations this year. “The difference in forecasts by market analysts for the best and worst cases can vary by double-digit figures,” he said.