Foreign investors turn cautious on China's property market as slowdown, political risks cloud outlook

By Pearl Liu

/ SCMP |

August 5, 2020 10:04 AM SGT

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China's economic slowdown and fraying ties with the US and other western governments have prompted foreign investors to temper their investment in local properties, according to Cushman & Wakefield.

They spent about 27.1 billion yuan (US$3.88 billion) on such assets this year as of June 30, the property consultancy said in a report. The 4.52 billion yuan monthly flow trailed the 6.76 billion yuan and 8 billion yuan pace recorded in 2019 and 2018, respectively.

"The tension between China and the US has really hurt the sentiment among foreign investors, some of whom are not familiar with such political turbulence," said Alvin Yip, who oversees the capital markets for Greater China and Hong Kong at Cushman & Wakefield. "The uncertainties made them hesitate about raising their bets in the market."

US-China ties are breaking down after two years of trade war spilled over into a tech war, while a deepening diplomatic row led to the abrupt closure of each other's consulates in Houston and Chengdu last month. The latest spat centres on TikTok, the wildly popular short-video app owned by Chinese technology firm ByteDance.

The cooling sentiment also came on the back of a historic slump in China's coronavirus-ravaged economy in the first quarter, which drove office vacancy rates in Beijing, Shanghai, Guangzhou and Shenzhen to all-time highs while shopping mall rents nosedived. The economy has since rebounded 3.2 per cent last quarter.

"Some investors, for example funds based in the US or the UK who are not familiar with the quick recovery of China's consumption-driven economy, are taking a wait and see approach," Yip said.

Travel bans and quarantine measures have also affected investments involving big outlays, Yip said. While the proliferation of technology has greased the process in pandemic times, "the final decision still has to be made on site," he added.

Despite the slower transactions, foreign investors have shown a penchant for cities like Shenzhen, the Silicon Valley of China and home to some of the nation's best-known technology giants like Tencent, Huawei and ZTE.

"Industrial parks and offices are sought after in Shenzhen as tech companies are flocking to start business or expand in the hub, a sector generally supported by the government," Yip said. "We see major industrial parks in the city with occupancy rates as high as 90 per cent."

Foreigners accounted for one third of all transactions in Shenzhen in the first half, compared with 14 per cent in 2019, according to Cushman & Wakefield's estimates. That trend may continue with the advent of real estate investment trusts (REITs).

"Overseas investors are still interested in commercial properties in China, particularly in first-tier cities," said Stanley Ching, senior managing director at alternative investment manager CITIC Capital. "The approval for REITs will revitalise existing real estate assets."

China implemented a pilot REIT programme on April 30, after more than a year of public consultations. It will allow China's mutual funds to issue public REITs that can be bought and sold like stocks on the country's exchanges.

The programme appears to place high priority on capital-intensive infrastructure projects with long payback periods, eschewing the more typical shopping centres, offices, hotels and rental homes.

"Traditionally speaking, shopping centres and offices are important components of REITs in other markets, for example Hong Kong and Singapore," said Ching. "In future, we will see further expansion of the properties that can be included in the publicly traded REIT products."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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