China’s property market is in trouble, and it is experiencing a significant collapse, which could impact the world’s second-largest economy. About a quarter of the GDP of the People’s Republic of China comes from the real estate sector and is currently undergoing a funding crisis so massive that development has stopped in its tracks (prompting a slew of buyers from dozens of cities to outright refuse to pay their mortgages). The existing home market is currently experiencing the steepest price decreases in almost a decade, and a crackdown on developers with heavy reliance on debt has only made matters worse. But while the Chinese government is still untangling the quagmire of its residential sector, U.S. investment into Chinese commercial properties underscores a bright spot in an otherwise bleak market.
American investment into the Chinese real estate market might be surprising to hear, considering the tense political relationship that’s been on the decline for some time now. A longstanding bitter trade war and a wayward Chinese surveillance balloon that was caught drifting over Montana last week have only made the situation worse. At least in the news, American and Chinese governments are under immense strain. But from an investment standpoint, it’s a different story entirely.
Of course, the financial crisis that has engulfed the property market has not spared the commercial sector. Residential investors scrambled to sell off real estate assets in order to maintain some semblance of liquidity in the wake of Evergrande’s fallout, and while assets were offloaded in the commercial sector for the same reason, the commercial market was buttressed by more supportive fiscal and governmental policies.
Within China’s beleaguered property market, the bulk of the strain is felt within the residential sector. Chinese residential real estate investors and their renters struggle with slower sales as well as recessionary and debt pressures, while commercial real estate investors and their tenants do not experience these issues. Deal recovery in the commercial real estate market is also greater than in the residential market because more players who are not impacted by financing limitations are still looking to buy and sell properties.
There are several reasons for this, one of which has to do with China’s surprisingly resilient office market. The work-from-home trend has not gripped Asian markets as much as it has in Europe and North America, so ghost-town levels of occupancy haven’t plagued China as much. Net absorption in the office sector has inched to the positive last year. As far as the office market is concerned, the pandemic’s effects will progressively wane this year and will have little to no effect on the activity of the office leasing market. The ability of businesses to grow will keep getting better as the market is predicted to rebound, which will help to unleash the need for offices.
Other commercial asset classes are also looking more favorable to foreign investment. President Xi Jinping’s insistence that the People’s Republic of China establishes a “self-sufficiency drive” in strategic industries, technologies, and high-end manufacturing in order to push through the COVID-19 pandemic has spurred interest in industrial and logistics properties, making them very attractive to foreign investors. Between the pandemic’s onset and last September, Chinese industrial real estate accounted for more than 20 percent of all global transaction volumes.
“China is going to focus on the economic growth story,” is what Qian Wang, a serial entrepreneur who has co-founded several real estate businesses in China and the U.S. over the past two decades, told me when I reached out to him for this story. “I think you’ll see more interest from foreign investors as the country opens up because a number of policies to support that investment will follow.”
Whatever your opinion of the Chinese government may be, economic policies to curry favor with foreign investors can be implemented within the blink of an eye. “Whatever the Chinese government wants to do, they can be very fast because they don’t have this, you know, back-and-forth debating that you see in U.S. politics,” Wang explained. “If they want to implement gains, they can do it overnight. Assuming the pandemic is under control, you will see a number of policies crop up to help stimulate the economy. And right now, China is prioritizing investment in commercial real estate to keep the economy afloat.”
A money story
But if geopolitical relations between the U.S. and China are so tense, and China is amidst a very public, very nasty real estate crisis, why are so many institutional players rushing to make real estate investments in this beleaguered market? Well, it’s because China’s commercial market is surprisingly resilient. This bright spot has caught the attention of many American brokerages who have been jumping to get a piece of Chinese CRE within the last few months. Tishman Speyer announced plans to invest in more Chinese commercial real estate as the country eases its zero-COVID policy and reopens to foreign investment. Goldman Sachs formed a joint venture with the local logistics firm Sunjade in China in an effort to increase foreign investment in Chinese infrastructure and logistics real estate (according to Goldman, the venture will profit from China’s growing demand for brand-new, high-quality infrastructure assets).
The technology side of the Chinese property industry is drawing attention from major players too. JLL Spark, the technology investment arm of global real estate services firm JLL, announced the JLL Spark China Venture Fund. The fund is allocated for China-based PropTech companies and is set to officially launch sometime this year. A JLL blog post that detailed the intention behind the fund explained that JLL was “inspired by the unlimited opportunities and possibilities in the Chinese market,” a sunny contrast of U.S./China relations compared to most other news floating around in the echo chamber.
JLL will identify and invest in technology startups through this new RMB fund (an investment fund established in China in accordance with Chinese legislation and funded with Renminbi, or yuan, the country’s currency). The intent is to provide investor and occupier clients with solutions in the fields of construction technology, sustainability, financial technology, smart buildings, industrial technology, and the future of work; you get the picture. In corporate-speak, JLL is out to “transform China’s real estate industry through technological innovation.” In layman’s terms, JLL sees mega monetary potential in PropTech built for Chinese real estate.
While this is the first time JLL has made a strategic investment into Chinese PropTech, it’s certainly not the first time JLL has been involved in the Chinese market. “We’ve actually been serving multinational customers in JLL for many years in China,” said Raj Singh, Managing Partner at JLL Spark. “But the opening of the fund is a sort of broadening of our ambition.” JLL is one of the top U.S.-based brokers in the Chinese market serving multinational customers, but it’s not the only institutional player making moves in Chinese CRE.
While China’s road to economic recovery will be a long and bumpy one, investment in Chinese CRE is expected to alleviate some of the pain while generating returns. Chinese CRE is experiencing a soft rebound compared to the rest of its property market, but institutional players from across the water are taking notice. China isn’t expected to have an overwhelming recovery this year by a long shot. But with such a huge market with unlocked potential, it’s not difficult to see why.