Deleveraging Boosts Opportunities for Foreign Investors in China’s Real Estate Market: C&W

China’s deleveraging campaign gave investors in China’s property market more opportunities to make deals this past year, according to Alvin Yip, president of capital markets for Greater China at Cushman & Wakefield, whose team handled 33 percent more real estate investment transactions in 2018 than they had the previous year.

“When the market was on the rise, we found it more challenging,” Yip told Mingtiandi in an exclusive interview. “With cash in hand, the developers would be reluctant to sell their core assets or the fund managers demand an unrealistic price. It was hard to chase those deals.”

With Chinese authorities now tightening lending conditions and tighter regulatory enforcement slowing the country’s housing market, more developers are looking for opportunities to raise capital by selling prime assets which is resulting in an uptick in market activity, according to the veteran broker who, together with his team, assisted with RMB 80 billion worth of transactions in the Greater China market in 2018.

Prime Assets Hit the Market in 2018

The properties available in 2018 which might not have reached the market in previous years included prime office assets in top tier cities such as Shanghai and Beijing, according to Yip.

In December, the Cushman team assisted a joint venture led by real estate investment manager AEW in purchasing a 21-storey office tower in the Beijing Oriental Culture and Art Center from Hong Kong-listed Hopson Development for a total compensation reported to be RMB 4.5 billion ($654 million), in a deal which Yip believes might not have happened under different market conditions.

“Grade A offices in Beijing were like golden eggs and previously the developers wanted nothing more than holding onto them. They were rare to come by,” Yip noted.

Shanghai also saw its share of office mega-deals in 2018 with Singapore’s CapitaLand announcing in November that its Raffles City China Investment Partners III (RCCIP III) fund had formed a 50:50 joint venture with Singapore’s sovereign wealth fund GIC to acquire the Star Harbour International Center project (上海星外滩) project in Shanghai’s Hongkou district for RMB 12.8 billion.

Yip added that, for many investors, office buildings in Shanghai and Beijing are the most desirable asset type because of healthy demand from corporate occupiers and the more straight-forward nature of managing office facilities.

Shopping Centres Attract Skilled Players

“Shopping malls, on the other hand, are a very different story,” Yip said in describing the market for retail assets in Greater China. “There are only a handful of players who are good at this as shopping malls require proper retail management and a readily available tenant pool.”

Despite these challenges and perceived threats from ecommerce, well-located retail real assets saw a number of landmark deals in 2018, particularly involving investors with expertise in managing shopping centres who were eager for the opportunity for enhanced return on investment that malls can provide.

In this past month Yip’s team assisted Link Asset Management, which manages the Link REIT real estate investment trust, in selling a set of 12 Hong Kong retail properties to a Gaw Capital-led consortium of investors for HK$12.01 billion. That deal, which also included Goldman Sachs and Blackstone among the buyers, came just over one year after the brokerage facilitated Link REIT’s sale of an earlier portfolio of 17 Hong Kong shopping centres to another Gaw-led group for HK$23 billion ($2.9 billion).

“Ecommerce can’t fully replace hands on experiences like F&B or entertainment,” Yip said. “A good retail asset with easy access, above the subway line with residential developments around is always attractive for serious players like Link REIT, CapitaMall or Joy City because they’re retail in nature with a view for long term.”

Also in recent weeks, Cushman & Wakefield’s capital markets team reportedly advised on Mapletree Investments’ $1.25 billion sale of its Mapletree Business City Shanghai office complex and the adjoining Vivocity Shanghai mall to a buyer said to be US-based alternative investment giant Blackstone Group.

Global Investors to Remain Active in 2019

Of Cushman’s 55 deals in 2018, nearly half came from Shanghai, where international players such as Blackstone find ready partners among local and international asset holders.

“Shanghai with its high liquidity is a Chinese city most favoured by foreign capital, which accounted for 60 percent of all transactions this year as Chinese domestic players became less active,” Yip said.

During the first three quarters of 2018 foreign investment in Shanghai’s property investment market leapt 83 percent compared to the same period the previous year, according to Cushman & Wakefield research, reaching RMB 23.5 billion in deals from January through the end of September.

Yip predicted that global investors will remain active in the China market in 2019. “China represents a sound story to international capital,” Yip continued. “The economy continues to grow, albeit slower. The cities are dynamic and there are lots of new economy players, yet the real estate price is only one third or fourth of that in a more developed Western country.

A global increase in real estate asset values is also working in China’s favour, according to Yip. “Traditional insurance funds or pension funds will need to increase their investments in China, if they hope to achieve the expected level of return,” he pointed out.

Value-Add Opportunities to Lead the Way

Looking into the new year, Yip said investors’ ability to enhance the value of existing assets will play a still larger role than in 2018. “Everyone one is looking for value add, whether it’s from commercial to co-living or co-working, from hotels to offices,” he said.

This trend towards redevelopment, repositioning and re-marketing existing properties could play further to the advantage of international players, many of whom have rich asset management experiences from more developed environments. “In the current market, yield compression remains stable and as a landlord, you need to have the ability to increase the rent instead of counting on macro speculation,” Yip said.

“For the long term, China’s deleveraging effort makes the market healthier which is a good thing,” Yip added. “Top Chinese developers will still be able to find financing, it’s just the costs are becoming higher; this means they will be a lot more cautious.”