China is expected to become the world’s largest economy by 2020, with nominal GDP surpassing that of the US. What will the commercial real estate landscape look like in this China of the not too distant future? A good place to start is to recap the evolution of China’s commercial real estate landscape in the past 30 years during different stages of economic development.
I have been fortunate to bear witness to this incredible transformation during my various visits to Beijing over three decades. My first visit to Beijing was in 1979 at the dawn of China’s “open door policy”. It was a shock adjusting from the bright lights of Hong Kong to a city of decrepit buildings and unlit streets filled with bikes, all signs of a country that had been isolated for decades. In 1990 and ten years since market reforms began, China was still very much a low-income country, there were almost no Grade A offices in the country, and no modern retail stock to speak of. The shopping experience was limited to state-owned department stores. In Beijing, China World Trade Center Tower I, a few luxury hotels and their retail podiums were the only modern additions to the city landscape.
As recently as 2000, in tandem with average income levels growing to equal those in Indonesia and the Philippines, China’s commercial real estate development was still in the in the early stages. There was a small amount of Grade A office stock and may be a few modern shopping malls in the Tier I cities – though these began to resemble the lower grade stock in Hong Kong, with a lot more being built or planned. In 2011, and arriving at the doorstep of middle-income status, China now has a large Grade A office and modern retail stock in the Tier I cities and a huge construction boom in the Tier II cities. In Beijing, infrastructure improvement leading to the 2008 Olympics has transformed the skyline and the CBD has begun to acquire a first-world look and feel.
Fast forward to 2020 and China will have firmly achieved middle-income status. Due to labour shortages and rising wages/costs, it will be undergoing or have partly gone through the same economic transformation that Hong Kong, Taiwan and South Korea experienced before. Much of the low-value added manufacturing activity would be relocated either further inland to the central and western regions or to the rest of emerging Asia. As it moves up the value chain, coastal China (with the Pearl and Yangtze River Deltas as its nerve centres) will likely become the hub of an even more complex international trading network, with China itself producing many of the components that it now imports from more advanced countries, while inland China, along with countries in South or South East Asia will take over the more labor-intensive processes. To facilitate this intricate manufacturing network, a lot more modern logistics facilities will be needed.
As well as the development of warehouses, major Tier I and II cities (e.g., Guangzhou, Shenzhen, Xiamen in the south, Shanghai, Hangzhou, Nanjing in the east, Beijing, Tianjin, Dalian up north, Chengdu, Chongqing, Wuhan further inland) should increasingly house the headquarters and ancillary offices of large trading/manufacturing companies (both domestic and MNCs), as well as the financial, professional and government services that support them. With 150 million more city dwellers in China between now and 2020, and with real income levels at least double their current levels, more will desire and demand the shopping experience that they see in the likes of Beijing, Shanghai and Hong Kong. All this points to huge potential demand for additional office and retail space in the Tier II cities nation-wide.
Marveling at the view from our brand new office in the new China World Trade Center Tower III on a recent visit, and looking back at the incredible transformation so far, I believe that the stage is set for an even more exciting chapter for commercial real estate development in China, and we in the Asia Pacific have the best seats.
