China’s continued economic slowdown is reshaping the country’s real estate market, as investor confidence remains high.
Tax cuts, increased infrastructure spending and demand from foreign investors will support China’s real estate market in 2019 in the wake of slower economic growth.
China’s economy grew 6.4 percent during the last three months of 2018, the slowest pace since the global financial crisis.
The property market accounts a meaningful proportion of China’s GDP growth and Beijing has, in the past, deployed stimulus measures to support the market. But the government’s on-going effort to deleverage the nation’s financial system has prompted a new approach.
“Real estate plays a very important role and has a direct and indirect impact on China’s GDP,” says Daniel Yao, head of research, JLL China.
To keep property prices under control, the central bank is pumping more liquidity into the economy to boost consumer confidence and the government is pushing banks to increase lending while making widespread corporate and income tax cuts.
“Previously the government would loosen real estate policy in response to a major slowdown, especially in the residential market, but they remain strict,” adds Yao.
Fresh infrastructure investment is also expected to boost the economy but the focus will be less on mega projects such as new metro lines, highways and airports, and instead on technology and telecoms infrastructure, supporting 5G networks and investment in artificial intelligence, for example.
This will create demand in the office and logistics real estate sectors.
Foreign buyers to tap the market
Conditions will remain tough for local investors, traditionally China’s key real estate dealmakers, who have seen their financing costs rise over the last 24 months. But foreign capital is expected to fill the void in 2019.
“In part due to the deleveraging campaign, domestic funds have been very quiet but this provides an opportunity for foreign buyers,” says Yao.
German insurer, Allianz, grew its portfolio in China in 2018 with office and retail assets, along with Blackstone and Singaporean developer CapitaLand.
“In terms of buyer profile it’s not just opportunistic or value-add funds from overseas that are looking at China, it is core, long term money with average holding periods of more than five years.”
This shows confidence in the market, which still looks relatively good against global GDP growth averages of between three and four percent, according to Warner Brown, Director of Research, JLL China.
Technology drives corporate confidence
Brown says real estate activity is being driven by corporate demand in tier one cities, which remains strong,
Net take-up in Shanghai sits at around 1.3 million square metres according to JLL figures, which ranks it among the world’s most robust occupier markets.
“China’s home grown technology firms will drive corporate expansion,” Brown says.
“Its Unicorns are becoming an important source of demand compared with a few years ago.”
This shift in China’s growth trajectory is part of the structural change from an investment-driven market to consumption-driven economy.
“China is growing from a bigger base, meaning that every year it’s still contributing a substantial dollar value of new economic activity, even when growing at a slower rate.” says Brown.
If successful, the measures to spur growth could soften the impact of the U.S.-China trade war, which weighed on investors’ minds in 2018.
The China International Import Expo, held in Shanghai in November, signalled plans to reboot demand through trade.
“The message is clear that China wants to show its global position and embrace trade links and cooperation,” says Yao.
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