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Market Insight – Surprise Capital Moves

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Market ignores politics; international capital keeps flowing into
industrial real estate in China

Seemingly against all odds, a huge influx of capital from the U.S. and other western countries came into China real estate during the first half of 2020. While a majority of western tenants and owneroccupiers have put their China expansion plans on hold, the amount of institutional money flowing into the country is reaching all-time highs.

In fact, despite the ongoing trade-war and Covid19, the first four months of 2020 saw a 3.52% INCREASE in overall USD foreign direct investment into China compared to the same period last year. This indicates that reduced investment in several industrial sectors, such as the automotive industry, was more than outweighed by investments flowing into others.

Billions of foreign investments flowed into China-focused real estate funds and property development companies. Examples include the setup of a USD 600 million logistics facilities joint venture between JP Morgan and Shanghai-based developer New East; a USD 200 million JV between New East and UK-based fund manager Actis; and the setup of an USD 800 million warehouse facilities JV by Australian developer and fund manager Logos along with Dutch, Canadian and middle eastern investors. Direct investments included an RMB 31.5 billion land acquisition in the Xuhui Riverside area by Hong Kong Land, the purchase of LG Twin Tower in Beijing by Singapore’s GIC Private Limited for RMB 8.46 billion, and the setup of a China headquarters in Shanghai by Allianz Real Estate.

Given the current trade-war, heated political finger-pointing, and global economic downturn, how could it be that foreign investment in China is on the rise?

While everyone tries to adapt to a ‘new normal’ in the way world works, one aspect of which is the negative interest on capital – a phenomenon that started before Covid19 – there is still a lot of money that wants to be placed where it is safe and at least somewhat productive. When analyzing investment opportunities in terms of the classic parameters of financial
risk, financial return and legal risks, institutional investors are apparently finding many current China opportunities to be quite attractive.

China is now the only active large market for a number of international businesses. The nation seems to have largely brought Covid19 under control as a result of its decisive government actions, production recommenced for the most part in March or April, and consumers are spending money both online and off. In industries like wellness, cosmetics,
healthcare, beauty, med-tech, biotechnology, semi-conductors, artificial intelligence, industry 4.0 and others, demand for goods, services and talent remains on the rise. For these reasons, China presents opportunities for a multitude of businesses.

The world around us is changing faster than most of us would like, but certain things seem to never change, one being the law of supply-and-demand. Multinational companies may accelerate diversification of their global production footprint in the coming years by setting up additional factories in locations such as Vietnam, India, Cambodia or Indonesia. Yet China will remain competitive as a sourcing and production base, and of
course will remain a massive market to sell into as well. From this standpoint, it is perhaps not very surprising that foreign investment flows into China industrial real estate showed a y-o-y increase for early 2020.
For the second half of 2020 we expect to see:

1) A continued influx of institutional money into Chinese real estate, in particular into logistics and other industrial spaces as well as office projects
2) On the occupier side we will see a number of firms backsourcing production of certain critical components to their home countries.
3) Many firms will double down on their activities in the China market, which for quite a few companies has already become the only remaining source of substantial revenues.