Kevin Thorpe speaking in Shanghai recently
China’s first-tier office markets will remain a “bright spot” amidst a tsunami of new supply scheduled to come online, argued Kevin Thorpe, Chief Economist and Global Head of Research for Chicago-based property services firm Cushman & Wakefield (known in China as DTZ/Cushman & Wakefield), during a visit to Shanghai recently.
While visiting Shanghai, Thorpe offered a wide-ranging update on the world economy, tracing the impact of macroeconomic trends on real estate markets globally and in China. Thorpe observed that China is now a top destination for real estate capital globally, with Shanghai ranking twelfth internationally for real estate investment sales volume, and Beijing coming in at number 37 globally, according to figures from the property agency.
“Capital preservation is king right now. Most of these cities are some of the safest places to invest your money, because they’re so large and so liquid,” said Thorpe, referring to the top 20 real estate capital markets in the world. “And these cities consistently rank near the top in almost every relevant economic metric.”
Based in the company’s Washington, DC office, Thorpe heads a team of analysts that tracks some 220 million square metres of commercial real estate space around the world, and in 2014, was recognized by the National Association for Business Economists (NABE) as the most accurate economic forecaster in the US.
On China, Thorpe observed that the government’s stimulus policies appear to be working, noting that 25 million net new jobs have been created since 2007, and the service sector, which leads demand for offices, now comprises over half of GDP. While manufacturing has slowed, Thorpe noted that this can be seen as part of the government’s plan to restructure the economy, a transition that the economist argues has been “actually pretty graceful.”
While Thorpe acknowledged that China’s rapidly mounting debt is a risk, he pointed out that the country still has an estimated US$3.1 trillion of cash reserves that authorities can use to stabilize and manage the economy.
In terms of commercial property, the main challenge for China is the tidal wave of new supply projected to hit the market over the coming years. China built an average of 2.4 million square metres of offices per year from 2009 through 2014, but over the next three years, a total of 27.1 million square metres more of new office space is expected to launch, far surpassing the anticipated 15.8 million square metres of demand. “This is actually really good, really robust demand for office space,” Kevin noted. “It’s just not enough to soak up all that new construction. Because of that, your vacancy rate’s going to rise” – from 21.5 percent in 2016 to 25.7 percent in 2018, according to DTZ/Cushman & Wakefield’s estimates.
This situation contrasts with trends in the U.S. and Europe, where overall vacancy is getting tighter, but is in line with rising vacancy levels in Asia Pacific over the past couple of years. Within China, however, there are marked disparities from one city to the next, with first-tier centres performing strongly while many lower-tier markets such as Chengdu, Shenyang and Chongqing are suffering much higher vacancy rates.
Some of the more intriguing insights from Thorpe’s presentation concerned how macroeconomic trends and current events impact property markets worldwide. The low oil prices witnessed since 2014 are a “massive net positive for most markets.” Every one penny decline in gas prices typically boosts consumer spending by one billion dollars over the course of a year, fueling demand for office and industrial space.
Thorpe also offered some investment ideas that may interest Chinese buyers hunting for deals overseas. Buy assets in U.S. “government towns,” like metropolitan DC and northern Virginia, that are set to benefit from expected federal spending hikes, Thorpe suggested. Another option is to invest in “sunbelt markets” in the U.S. with strong long-term employment growth such as Atlanta, Dallas, and Phoenix.
For foreign investors, Thorpe recommends: “Don’t be afraid to partner with some other investor, and don’t be afraid to go a little bit further away from the core of the city,” to thriving places like Bethesda, Maryland, a community just northwest of the US capital. “There are a lot of pockets around the core of the city that I think foreign investors sort of miss, and I wouldn’t be afraid to think about those opportunities for returns.”
This post is sponsored by DTZ | Cushman & Wakefield. For more information, please visit www.dtzcushwake.com
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