China’s real estate hits high-water mark

February 15, 2017 / By  

For many years, observers have been fascinated by the RMB 200 billion mark, a target of transaction volumes that the real estate industry had long hoped for but deemed unlikely.

But here we are, for the full year of 2016, when transaction volumes in China reached a record breaking RMB 209 billion, an increase of 53 per cent y-o-y. Following a slow first half of 2016, the market recovered in the second half of the year, with overall Q4 2016 transaction volume reaching RMB 91 billion; a 45 per cent  q-o-q increase and a 36 per cent y-o-y gain. In terms of asset types, the office sector continues to dominate the investment market in China in 2016 with a total of RMB 114 billion transacted (21 per cent y-o-y gain), representing 55 per cent of total transactions.

Retail was the second most sought-after asset, with a total of RMB 41 billion transacted, which translates to a 70 per cent y-o-y increase. Demand was driven by strong online sales, leading to a subsequent increase of transactions within the industrial and warehouse sectors. Total transactions in the retail sector reached RMB 18 billion in 2016, a ten-fold y-o-y increase.

Shanghai continues to dominate China’s property investment market in 2016, with transaction volumes of RMB 100 billion, accounting for 48 per cent of total transactions. Beijing was the runner-up, accounting for 16 per cent of all transactions in 2016, while Shenzhen came in third at 10 per cent of total transactions.

Mega deals recorded in 2016

The largest transaction in 2016 was Shanghai Century Link’s RMB 20 billion purchase – a joint venture of ARA Asset Management and China Life. This was a deal which also set an all-time price record for the purchase of a single asset. In the retail space, we recorded the largest transaction in the whole of 2016, with Chongbang Development purchasing an 80 per cent equity stake buyback of Shanghai’s Jinqiao Life Hub for RMB 5.5 billion.

In addition, among portfolio deals, Legend Holdings’ RMB 13.8 billion was the largest transaction in 2016, followed by COFCO’s sale of its Joy City portfolio for RMB 9.3 billion. Also worth mentioning is Columbia Pacific Management’s equity sale of its senior housings to Temasek Holdings for RMB 1.3 billion, as the two formed a 50/50 JV to capitalise on China’s ageing population.

Catalysts and swing factors for 2017

Having reached the RMB 200 billion watermark, the question for 2017 is: will investment volume in China match or top 2016?

On the positive side, with China needing to reach its targeted GDP growth of 6.5 per cent for 2017, ample market liquidity and low interest rates should continue.

With capital controls and increased scrutiny on overseas investments, China’s insurers and investors will continue to be aggressive buyers in the domestic market, with income-producing assets at prime locations being treasured.

However, yield compressions, a depreciating RMB and limited quality assets for sale could be discouraging factors for investors. 2016’s investment volumes could be an indication looking forward in 2017 and the tip of an iceberg if domestic demand and buying continues at its current volumes.

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