Opportunity knocks in the home of Confucius

November 2, 2018 / By  

With ancient Taoist and Confucian heritage, the North China province of Shandong is famously known as the hometown of Confucius – but beyond its sacred peaks lie a growing commercial real estate market with vast opportunities for foreign investors.

As policy further restrains domestic capital, foreign investment in Chinese real estate is expected to rise, and as this interest spills into some of the smaller cities, we look at the appeal of Shandong’s binary star: provincial capital Jinan and port city Qingdao. Following a huge spike in transaction volumes for both cities in 2017 – with 2018 projected to see more assets surfacing on the market – these markets offer maturing assets in strategic geographies alongside growing economies.

Figure 1: Qingdao and Jinan Transaction Volumes (2012-2017)

Qingdao retail market matures

A mature market with relatively high liquidity, the Qingdao retail market is supported by strong seasonal tourism. The sector advanced others early on, although it was not until after the 2008 Olympic Games – which put Qingdao on the world map – that foreign investors came to the market in 2011. Sixty-eight percent of retail transactions in the city have since been undertaken by foreign investors, suggesting a level of confidence in the market. Limited retail supply and a growing consumer base of local and provincial customers with increasing disposable incomes are forecast to help drive growth momentum forward.

Jinan office attractively priced

The strong provincial and regional headquarter presence of SOEs and banks form the pillars of demand in the stable Jinan office market. Domestic institutional investors and owner-occupiers have helped to develop a steadfast market in recent years, after acting upon the attractive prices generated from a 2015 supply peak. Premium assets are expected to benefit from steady demand, while the impact of oversupply on capital values may appeal to some investors.

Logistically sound

Serving an important interchange station on the Jing-Hu high-speed railway, which connects the Yangtze River Delta and Bohai Economic Rim, Jinan benefits from robust logistics demand with limited lettable space and a market that has recorded annual rental growth highs of more than 20% since 2017. In Qingdao, the construction of a new airport in Jiaozhou county is leading the surrounding area to quickly emerge as a key logistics hub to serve growing activity from third-party logistics and e-commerce firms.

A fast-developing marine industry and smart manufacturing sector are destined to drive growth and industrial upgrades in Qingdao, while strong headquarters demand pushes Jinan to become a regional economic centre. As foreign investors look to diversify, the binary star of Shandong may just be worth considering as these markets are expected to bear an active investment market ahead.

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