Fast-growing companies are transforming real estate markets across China, a signal that the country is moving further away from its position as “the world’s factory.”
Technology firms and service-based companies are filling up towering glass skyscrapers. Logistics groups are piling into warehouses used to satisfy expanding consumer demand.
“Fast growing-firms are changing China’s corporate landscape,” said Jeremy Kelly, Global Research Director at JLL. “We need to look at is how China’s cities are moving into the innovation economy.”
For investors, the maturing property market presents a tantalizing opportunity: A new way to access one of the world’s fastest-growing economies.
The path is not without hurdles. China’s property market still grapples with transparency issues, and foreign investors face stiff domestic competition.
But as the corporate space expands, direct investment into China’s commercial real estate market could blossom to US$150 billion a year, from the current US$40 billion, according to JLL’s China 12 report.
This level would see China challenging the U.S. as the biggest commercial real estate investment market in the world.
China’s burgeoning corporate landscape “is creating new opportunities for investors,” said Kelly, who authored JLL’s China 12 report, which identifies 12 cities with the greatest potential for growth.
Currently, State Owned Enterprises (SOEs) in the finance, manufacturing, and energy sectors dominate office investment in China.
But the SOE dominated market looks set for a significant shake up as they are forced to compete with private technology companies for talent, says Joe Zhou, Head of Research for Greater China, JLL, said
“They are much more efficient, creative and international, while SOEs are struggling to reform,” he says.
Private and foreign companies lease most of the Grade A space in Chinese cities, but with next generation companies nipping at their heels, SOEs will be forced to get creative with their space, he says.
“Workplace is a really hot topic here. Millennials care about the space provided and they [SOEs] want talent to help them grow,” Zhou says.
Beijing, Shenzhen, and Shanghai, dominate in terms of innovation capabilities. But expanding companies are also targeting smaller cities to get closer to specific talent and policy makers in China’s vast provinces.
Huawei already has multiple R&D hubs across China, and Alibaba’s HQ in Hangzhou has transformed the fortunes of a one-time silk and tea trade port. Earlier this year, it announced plans to establish its regional headquarters in Xi’an in Western China.
“To increase their market share nationally and internationally they need to expand within China and beyond,” said Zhou.
Beyond China’s borders
Still relatively unheard of outside China, these companies need new turf to continue their upward trajectory.
Huawei’s smart city solutions serve over 120 cities in more than 40 countries while internet giants such as Baidu, Alibaba and Tencent, are beginning their global expansion in earnest. Drone manufacturer DJI and smartphone manufacturer Xiaomi are following in their footsteps.
Outside of the office sector retail real estate is benefiting from China’s corporate expansion.
Most of these major Chinese companies specialise in e-commerce and technologies that are transforming retail.
“Five years ago, everyone complained that e-commerce took market share from physical space but now these companies are becoming tenants, mixing online and offline,” said Zhou.
Alibaba’s Hema supermarket is the ultimate manifestation of this trend. Shoppers use an app to shop and pay in-stores, which house on-site warehouses to enable delivery within as little as 30 minutes.
Foreign investors still view China’s real estate market with cautious skepticism and face stiff competition from domestic investors. The returns on offer don’t compete at an international level and then there’s the issue of transparency. All mainland cities fall into the semi-transparent category although Shanghai and Beijing sit on the cusp.
Kelly says there is a long way to go.
“One has to question issues of transparency and, unless resolved, investment flows into China will be constrained.”
But with President Xi Jinping’s pledge to reduce barriers to foreign investors, the market holds promise for overseas institutions and funds whose expertise are sorely needed.
“Things are changing as the government tries to reduce credit; domestic financing is getting increasingly expensive and difficult to access,” says Zhou. “Foreign funds are looking more attractive as sources of financing and foreign asset managers have an opportunity to export their expertise.”
And 2018 could see the introduction of long-awaited residential REITs as part of the government’s effort to deal with an urban housing supply shortage and subsequently overheated property market.
“Since the government is now encouraging developers in the rental market, a REIT could come into play this year. If China has residential REITs then the market will grow up quickly in terms of transparency.”
For Zhou, this is one of many steps in the right direction: “I see quite positive direction from the government. There have been many personnel changes within regulatory bodies and this is a good sign; we see lots of professionals and academic rather than politicians becoming governors of industry and this background will only aid transparency.”
Click to read more about whether REITs are the next big thing in China.