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April 15, 2016

One of the questions I am asked most often, particularly when in Europe or America, is: “Are the Chinese property markets going to go up or down?” It is impossible to answer this question with a simple answer.

China’s growth, once a driver of the global economy, is now a major concern for investors around the world as it slows from previous higher rates. As we all know, from 2002 through 2011, China’s growth rate was remarkable, averaging about 10 percent per annum. But that has fallen steadily to 6.8 percent in 2015, and it’s projected to slide further to 6 percent by 2017. At the Federal Reserve’s most recent meetings, uncertainty over China’s economy has in part led to it scaling back its projection for a 1 percentage point rise in interest rates over the year. Indications now are for interest rates to rise just half a percentage point this year.

China’s economy has experienced a loss of the labour-cost advantage to other developing countries. Some sectors are suffering from excess capacity due to government-directed over-investment, particularly in manufacturing. Other issues relate to how the country is transitioning from an investment-led economy to one that is more dependent on domestic consumption. Although China’s manufacturing sector has shown signs of weakness, the service sector has expanded considerably and taken up the slack, and further growth is expected.

The scale of China, both economically and geographically, and the rapid change through which the country is going, has resulted in all sorts of different dynamics in the world of Chinese real estate.
For every manufacturing company, that is contracting, there is a logistics company that is expanding to cater for the growing demand of online shoppers. For every luxury retailer whose growth is on hold, there is a middle market retailer who is looking to expand. For every state-owned enterprise looking to shed office space, there is a private sector service company looking to upgrade and expand its office footprint. For every residential “ghost” town, there is a suburb in large Chinese cities, which has a shortage of good quality accommodation and plenty of unsatisfied buyers.
In recent years, the country’s booming e-commerce sector is fuelling demand for industrial real estate. China-wide logistics remains one of the more compelling stories for investors, thanks to a fundamental imbalance between demand and supply. While demand is rising, supply is constrained by government limitations on land for logistics use.

Before the global financial crisis of 2008, the logistics market was focused on Tier 1 hubs like Beijing, Shanghai, Guangzhou and Shenzhen. As China’s prosperity spreads inland, developers have established presence in Tier 2 and even Tier 3 cities – where location and infrastructure make them ideal inland distribution centers. This has resulted in a new national hierarchy of logistics hubs.
In the residential sector, sales volumes across 20 major cities in China shot up by 28 percent year-on-year in 2015, based on our latest data. Meanwhile, in the office market, domestic financial services companies expanded aggressively in Tier 1 and 2 cities such as Beijing, Shanghai Guangzhou and Shenzhen with rents in these regions showing rapid momentum, although third- and fourth-tier cities still face excess supply. In some Tier 1 cities, moving out of the central business district was a popular option for cost-conscious multinational occupiers, especially those in the manufacturing and trading sectors.

Shanghai, in particular, showed strong leasing market fundamentals triggered by high investor interest, and an increasing number of core investors have entered the market. Total take up of office space in Shanghai reached 1.45 million square meters in 2015, that’s more than Tokyo, London and New York combined.

All these different drivers are resulting in prices rising in certain sectors and locations-and prices falling in others.

For all the negative headlines, the economy in China is still growing. It could be argued, therefore, that the net effect is the demand for real estate space is still rising. Matching this demand with current and likely future supply, market by market, is the key to making smart real estate decisions.

For now, China’s growth will continue to be perceived as a wild card in the global economy. However we are seeing significant developments on the ground, which would indicate that China’s economy is adjusting to a new normal. Some times news headlines alone do not tell the full story. The only quick answer to the question of whether the country’s real estate market is up or down is “both.”

This article originally appeared on The Nikkei Asian Review

Alastair Hughes, CEO, Asia Pacific, JLL
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