As I wrote earlier this month, China’s economic slowdown is likely to be with us for some time to come, as it is primarily the result of the early stages of a structural rebalancing between investment led growth toward more consumption led growth, combined with a cyclical slowdown resulting from weakening external demand. This subject has been widely discussed in the intervening weeks and we continue to believe that the restraint shown by policy-makers by not ‘pushing the housing button’ is an intentional positive sign, and not the result of a political power vacuum.
But what’s happening on the ground? How are the effects of this slowdown impacting companies in the real economy and how is it effecting the real estate sector? How does it compare to the period at the end of 2008 and the beginning of 2009?
I have two main observations which I would like to share. First, I do not sense a lot of concern about job security among local Chinese people or expat managers. There have not been any significant layoffs that people are talking about around the proverbial water cooler and we have not seen many companies mentioning hiring freezes. Back at the end of 2008 and the beginning of 2009, everyone was nervous about job security and many companies were either laying people off or furloughing workers.
Second, while clients have been delaying decision-making about new investment or office relocations, as is often the case during periods of uncertainty, we have not seen widespread cases of projects being canceled outright or moth-balled. It has been a question of when, not if, projects will go forward. Again, back in 2008/09 we were seeing projects disappearing off of drawing-boards every day, in spite of the optimism the local China management may have had about the stimulus led recovery, global headquarters’ decision-makers were simply hiding under their desks and there was no money for any new investment.
The implications for commercial real estate in China as a result, are that demand has softened, leases are taking longer to sign, negotiations are dragging out, but demand is not disappearing and people are not panicking. Pricing power for landlords has diminished in most markets, but we are not seeing rents declining yet either. There remains an underlying confidence in China and in the opportunities that most companies see in their industries. The demand is still out there, it’s just a bit more cautious at the moment.
