The development of a real estate investment trust (Reit) market in China has the potential to double the size of Asia’s listed real estate market, according to an industry expert.
It comes as a recent Deutsche Bank report estimated the potential size of China’s Reit marketplace at around $172 billion.
Peter Verwer, Singapore-based chief executive of the Asia Pacific Real Estate Association (Aprea), said: “Whichever way you look at the numbers, a mainstream C-Reits platform would double the size and value of Asia’s securitised real estate markets.”
The Deutsche report follows another recent study of mainland China’s extraordinary development by real estate specialist JLL. The "China60" report estimated there were around 144 million square metres of grade-A office, logistics and retail stock across China’s major markets, along with around 260,000 "internationally branded" hotel rooms.
Deutsche converted JLL’s figures to compute an institutional grade real estate universe conservatively valued at $1.146 trillion. It arrived at its $172 billion figure by assuming 15% of this stock converts to Reits, which tallies with Singapore and Hong Kong levels of listed real estate assets.
Currently the physical stock of investment grade real estate in the US is currently five times larger than China’s, according to JLL. For anyone doubting the sustainability of China’s growth story, the scale and expected demand for quality real estate assets is going to grow strongly in the next 10 years, the report said.
KK Fung, managing director for JLL Greater China, commented: “China’s ‘new normal’ is one of lower but more sustainable growth (5-6%). The country is moving up the value chain and the unexpectedly strong uptake of e-commerce is adding a new dimension to China’s dynamic.”
The report said that China was now home to the world’s largest online population: “This will transform demand for retail and warehousing space across China. Its effects are also rippling through the office and hospitality sectors.”
In the real estate sector, the hype has subsided and the "build it and they will come" approach is no longer viable. “The emphasis has now switched to corporate demand," said the JLL report. “Excess supply has become a far more visible feature of all commercial real estate sectors, but China’s cities have the fundamentals to deliver strong demand over the next few years.”
What is becoming evident is the breadth and depth of demand from the domestic private sector, from financial services, professional services and business processing, through technology, telecoms, e-commerce, creative industries, healthcare, life sciences and retail brands. The country is home to an increasing number of globally competitive multinational firms such as Alibaba (from Hangzhou) and Huawei and Tencent (both from Shenzhen). As domestic companies expand and upgrade their space requirements, demand for grade-A space is already hitting a tipping point, and will contribute most of the demand for an additional 50 million square metres of grade-A offices by 2025.
We are going to see “a new era of city competitiveness”, the report said. Guangzhou and Shenzhen, Chinese tier-1 cities, are undergoing profound restructuring as the established hub of the Pearl River Delta region of 41 million people. Their potency is heavily linked to their connectivity with Hong Kong.
Prospects are strongest for the tier-1.5 cities such as Chongqing, Chengdu, Wuhan and, notwithstanding recent events, Tianjin. Xi’an has also moved into the Tier 1.5 category in 2015, having seen outstanding growth as a regional powerhouse for the northwest region.
JLL has produced a City Momentum Index that factors in overall economic activity, corporate activity, construction, property prices, investment, technology, environment and education. The top 20 contains seven Chinese cities.
JLL City Momentum Index 2015
2. San Jose
6. Ho Chi Minh City
9. San Francisco
18. New York
Aprea’s Verwer commented: “Clearly, China’s ongoing urbanisation is a machine for creating more demand, more real estate stock and more investment opportunities.”
JLL believes that financial sector reform, liberalised capital flows and less bureaucracy will make it easier for foreign investors, “while the introduction of Chinese Reits will eventually lead to more consolidated ownership and a new exit strategy for developers and owners.” China’s first Reit began trading in mid-2014.