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July 10, 2015

A persistent slide in China shares may lead to increased outbound real estate investment as domestic investors potentially seek safety in other markets and hedge risk, says JLL.

“If this slide lowers confidence in the domestic economy, it will encourage even more outbound investment as the year goes on,” according to Steven McCord, Head of Research for JLL in North China.

JLL is expecting China’s outbound investment to rise to US$20 billion by the end of this year, up from US$16.5 billion in 2014. Last year’s 46 percent surge in outbound investments lifted China into the top five major cross border capital sources worldwide.

Increased outbound investment from China will add to global capital flows in commercial real estate. In fact, according to JLL’s preliminary report on the worldwide movement of real estate capital, global transaction volumes in the first half of this year totaled US$315 billion and are expected to rise to US$750-$760 billion by the end of 2015.

The current plunge in Chinese shares may be compared with the stock rout caused by the Global Financial Crisis of 2008. Following the GFC, alternative assets, which include real estate, saw an increase in investment as investors turn to higher yielding, longer-term hard assets. This was helped by record low interest rates globally and volatility in share markets.

About US$3 trillion in value has been wiped off China’s equity market and this has led to the Chinese government suspending initial public offerings and share trading. Meanwhile pension funds and brokers were encouraged to buy more shares. Government intervention in stock markets isn’t uncommon; previously Hong Kong and Japan have all acted after panic selling led to stock market crashes.

Despite the raft of policy changes, share prices continue to slide. The CSI 300 index is down about 31 percent from its peak in early June.

The malaise in China stocks has now spread to other asset classes, signaling that investors may be losing confidence in the broader market. China’s currency, the yuan, fell to a four-month low in offshore markets while the yield on China’s benchmark government bonds rose sharply.

As investor confidence wanes, potential buyers in the domestic residential market will likely postpone their purchases, says McCord. However, high-end homebuyers may be better diversified across asset classes and geographies and will likely be less affected by this slump.

While the stock rout will impact China’s capital market and residential home sales, the short-term effect on the office sector is likely to be minor.

According to JLL research, there are a number of small wealth management firms as well as brokerages that are involved in buying and selling equities, however the space they occupy in the Beijing Grade A market is not large.

“Based on our detailed survey, we are aware of only about 60,000 sqm to 70,000 sqm, in total, of domestic financial firms under 500 sqm in the Grade A lettable market,” says McCord. “In the worst case scenario, we would have a short-term two percentage point increase in vacancy in Beijing Grade A office properties. But given what we know about market demand in other sectors – notably IT — someone else would swoop in and lease any spaces that free up.”

Based on JLL’s preliminary data for Q2 2015, investment volumes in China climbed 29 percent year-on-year in the second quarter of 2015. Greater China, in particular Shanghai, was the most active. This trend was despite a slowdown in China’s economy.

Steven McCord

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