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November 13, 2015

Despite volatility in China’s stock market and a general slowdown in the domestic economy, the country’s real estate investment transaction volumes this year may rise to near record levels registered in 2013, according to projections from JLL.

Transaction volumes reached an all-time high of RMB 140 billion in 2013 while last year’s volume was approximately RMB 100 billion.

“With a considerable pipeline of deals that are on the market, investment volumes will likely stay strong into the end of the first half of 2016,” says Joseph Kim, Director of Research for JLL in China. Institutional grade deals accounted for RMB 23.4 billion worth of deals that were transacted year to date.

In the third quarter, Shanghai saw the sale of three major office developments. Corporate Avenue 1&2 was sold for RMB 6.6 billion to Hong Kong’s LINK Reit, China’s Ping AN Life Insurance bought GC Tower at RMB 2.2 billion, and Yuexiu REIT acquired the Hong Jia Tower at RMB 2.6 billion.

“Mega deals (those above USD 1 billion) are no longer limited to markets in North America and Europe. With increased competition and strong market fundamentals, mega deals may become more common in China,” Kim says. “Shanghai will continue to be China’s most active market in the near term, with a total of RMB 13.8 billion in commercial transactions completed in the third-quarter of this year,” Kim predicts.

Domestic capital dominates

Typically, domestic capital is the biggest source of investment volumes. In the first half of this year, local investors accounted for 78 percent of real estate transactions.

While global investors continue to be attracted to office assets in Tokyo, Sydney and Melbourne, commercial buildings in China’s Tier 1 cities such as Beijing and Shanghai also ranked highly among investors’ leading preferences. “We are observing a polarization of risk appetites amongst investors,” says Kim. “On one end of the spectrum are offshore REITs which prefer core or core plus types of deals. On the other end are investors who have more opportunistic mandates. These investors are moving up the yield curve to look at assets such as service apartments, residential units and B-grade office towers with refurbishment or value-add potential, to get the yields.”

Capital values in Shanghai this year are projected to rise by at least 10 percent this year, similar to gains in London while in Beijing, prices are projected to climb between 5 and 10 percent. Last year, transaction volume in China ranked third after Australia and Japan.

In China, office developments are a favoured asset class for foreign institutional investors, in part because of relatively straightforward revenue streams, which make valuation easier, according to Kim. In addition, office assets typically makes up a much higher portion of the investment mandates for funds raised to invest in China, he adds.

Going forward, capital market developments such as China’s first publicly traded domestic REIT, demonstrates the central government’s support towards the healthy development of the property industry by improving market transparency and funding. Earlier this year, China’s first publicly traded “REIT-like” security, Penghua Qianhai Vanke, received approval to list on the Shenzhen Stock Exchange.

Why China?

“One of the key question often asked by almost any outside investor who visits China is why invest in China; On a comparative basis, there are other Asian countries which possess attractive investment spreads.” says Kim. “The fact is, real estate in China still remains relevant because there are indicators that the economic growth drivers are intact. China is a big market with so much development potential. In addition, both internal and external policies are geared towards the gradual internationalization of the capital market.”

John Saunders, Head of Asia Pacific Real Estate at Blackrock told Reuters in September that the company is ready to increase its China real estate portfolio exposure as its sees good entry points following weakness in the nation’s economy and credit environment.

“There is an abundance of capital in China, all looking for the same opportunities,” says Kim. “Investors who are able to set aside the “perceived risk” of China and are comfortable with navigating through all the intricacies of the market will find opportunities to invest,” he says.

Kim regards logistics assets to be attractive. “There are still asset classes such as logistics, which offer relatively high yields backed by very strong demand drivers such as e-commerce,” says Kim. Besides Shanghai, Beijing and some of the tier 1 / 1.5 cities, the other markets are disproportionately underdeveloped, hence; once yields become compressed to a level where investor appetite wanes, interest will flow through satellite cities of Tier 1 logistics hubs such as Dongguan, Kunshan and Langfang,” he adds.

*1RMB= USD 0.16

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Joseph Kim

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