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State of the Market:International Investors Return, Prices Diverge by Tier

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With a yearly GDP contribution of about 26% China’s construction and real estate industry has for decades been the main driver for the world’s second-largest economy. Over the past months we have seen an abrupt construction industry slowdown if not crash. Not a real estate market crash, though. In the 2009 ‘financial crises’ property prices in many U.S. cities declined by about 50%, people walked away from their mortgages, banks were left sitting on bad loans etc. In China this has not happened, yet, and it is very unlikely to happen.

Overall residential real estate prices are only down about 10%. Noting that some cities like e.g. Shanghai see almost no decline at all of course indicates that there are other cities with somewhat substantial declines of about 15% and in some cases even up to around 25%. This is painful for the individuals involved who have to deal with related losses, but one can not speak of a crash. What has crashed is the amount of new residential real estate projects being launched. Here we see a decline of about 50%. This is in great parts in line with the government’s strategy as there is a general belief that the amount of apartments built to date are actually sufficient and that continued heavy construction activity might end up in a speculative bubble.

There is a polarization taking place with tier 1 and tier 2 cities remaining stable and prices in some sectors such as manufacturing properties and retail properties even going up, while at the same time prices in tier 3 and tier 4 cities are declining, especially when it comes to residential properties and office buildings.

During the first six months of 2023 Chinese investors held their powder dry in order to comply with government directions and in order to act with caution in a difficult market environment. In parallel, for the first time in two decades, international institutional money almost entirely stopped pouring into the Chinese real estate market. This may at least partially be attributed to fears of a real estate market crash resembling the one of the US and Europe in 2009. These fears have now apparently been overcome.

Groups such as Brookfield, Tishman Speyer, Silkroad, LaSalle, JP Morgan, Kerry, CapitaLand have all used recent months for investments in the USD 100million to USD 500million range, overall totaling in billions of USD investment in China by Western institutional investors. Obviously projects were acquired with better prices and deal terms than what was commonplace during the boom years of 2015 to 2020.

An asset class which nowadays for the first time is getting significant attention in China are rental apartments / condominium projects. At least a dozen large-scale investment projects have taken place in this area including by some of the above-mentioned players. Let’s look at just one example in order to illustrate the nature of these investments:

Brookfield Asset Management, has acquired a rental residential project located in the Jing’an District of Shanghai. The project is situated in the core urban area within Shanghai’s inner ring, covering multiple core business districts. The total above-ground construction area of the project is approximately 18,000 square meters. In the future, it will offer around 280 high-quality rental residences and is set to enter the market in 2024. The project will continue to use the ” 博邻 blinq” brand and will target the mid to highend market. The transaction price did not get disclosed but at a per sq.m. comparison with other transactions in the area one can roughly estimate the transaction price to be in the area of about USD 150 million.

Not only in the real estate sector also overall in the Chinese economy there are signs off increased activity in Q3 2023. Which may be the reason why the International Monetary Fund (IMF) has raised its growth forecast for China for from 5.0% to 5.4% for 2023 and has raised its forecast from 4.2% to 4.6% for 2024.