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October 4, 2019

Beijing’s commercial real estate market is on pace for a record year, with foreign investors swooping to pick up assets from domestic firms contending with tighter financial policies and economic uncertainty.

Commercial property investment in the Chinese capital hit approximately 25 billion yuan (US$3.5 billion) in the first six months of 2019, compared to the 38 billion yuan for the whole of 2018, according to data from JLL.

“Market conditions have been more favourable for foreign investors than previously,” says Mi Yang, Head of Research for Beijing & North China at JLL. “Although there has been some recent loosening in policy, the tight-monetary environment remains largely in place.”

The Chinese government imposed capital controls at the end of 2016 in a bid to boost the domestic economy. Policies included restrictions on Chinese investment in foreign companies and overseas real estate, as well as stricter limits on issuing bonds and loans denominated in foreign currency.

“This, combined with ongoing economic uncertainty, means that some domestic owners continue to be under great financial pressure, and this may result in more assets being offloaded into the market by year-end,” Yang says.

Rare assets
Tradeable core assets have traditionally been scarce in Beijing, where the real estate market is characterised by long-term holds, Yang says.

“Owners of assets in core areas are typically reluctant to release these properties, all too aware that they will be difficult to replace,” he says. “Over the last decade, office buildings in core areas of the city have accounted for just 13 percent of total en-bloc transactions in Beijing.”

But due to mounting financial pressures in the last year, some owners of core assets in Beijing have been looking to offload. Meanwhile, outside of the core submarkets, government-led development plans have given rise to new opportunities in emerging areas such as Tongzhou and Lize.

“In a bid to grow preferred industries in these areas, such as finance, the government is offering tax breaks and rental subsidies for qualified tenants,” Yang says. “Several investors have already moved into these areas due to their long-term growth prospects.”

Value in conversions
In addition, there is great interest in conversion projects due to government support for innovation-centric projects and tech companies. Repurposing old or vacant retail and hotel properties for office use continues to be highly popular due to the potentially huge rewards, says Yang.

“In limiting core supply, restrictions placed on commercial development in the city centre have led to a surge in enthusiasm for office conversions in recent years,” he says. “But as policy tightens and effectively limits the number of projects that can be converted into office space, transforming old properties into innovation centres is likely to be a bright spot in the market.”

“This would complement the fast-growing tech sector in Beijing and may even lead to a rise in ‘convert-to-suit’ opportunities.”

Click to read how REITs are providing opportunity in a tight APAC market.

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Mi Yang

Head of Research for North China at JLL.

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