Chinese dragon burns brighter
Since China started its economic reform it has managed to restructure its economic system and attract huge amounts of foreign investment. During the first three quarters of this year, China’s economy grew 9.5%. Since December 2001, China’s entry into the World Trade Organisation (WTO) has encouraged various international companies to set up or enlarge operations in Shanghai in anticipation of greater business opportunities.
In return, China promised that the Chinese market would be opened up gradually within five years (by 2007). As a result of the accession to the WTO, China became the largest potential market in the world. Even though China has been among the top countries worldwide to absorb foreign capital over recent years, both in volume and growth, foreign investment in the local real estate sector has been limited due to the following difficulties.
Even though purchasing international real estate is a positive diversification of investors’ assets out of the dollar (or any other hard currency), the Chinese Reminbi might not be a favourable currency for investors.
The legal system
Usually foreign investors are used to operating with investment vehicles which have been developed for decades and where reliable operation models have been established. However in China, both domestic and foreign investors now can only feel their way within the vague boundary of the existing regulations that may have an indirect implication to their business activities. Foreign investors, in particular, must try to cope with this unfamiliar and regulatory environment.
Clumsy withdrawal procedures in repatriating profits is a key factor constraining the development of overseas funds.
When investing in the Chinese real estate market, how to adjust business models to accommodate the local market’s culture and practices has become a crucial problem to overseas investors. Most investors lack an understanding of the overall market while making their decisions.
Most foreign investors find it difficult to secure finance from local banks. The local banks are reluctant to lend capital to foreign institutes who do not possess any assets locally or have any previous business track records on the ground.
As China continues to open markets in accordance with obligations under the WTO, and with an expected resurgence of other major global economies (such as the US, Japan and most EU members), China, and in particular Shanghai, will remain an attractive destination for foreign investment. Inadequate new supply in 2004, combined with robust demand, means that the office market is expected to continue its upward trend. Vacancy rates will remain low (less than 10%) and rents will grow steadily over the remainder of the year rising by 5-8% over the year as a whole. However, the considerable volume of new stock anticipated in 2005 will provide some relief for tenants. As a result, it is expected that rental growth will slow or possibly stabilise within a confined range next year.
As for the retail market, according to China’s commitment to the WTO, the wholesale market will be fully liberalised by 2006, which means foreign retailers may engage in the wholesale of all kinds of imported general merchandise (except salt and tobacco). China will open its books, newspaper and periodical wholesale market to overseas investors by the end of 2004. Overseas investors will be allowed to form book, newspaper and periodical wholesale and retail firms on the China market starting from 2005. The outlook of more overseas retailers getting ready to enter this market illustrates a competitive market with more opportunities both for local and foreign retailers in the near future.
As a gateway to the China market, new supply in the central business district area of Shanghai continues to be limited with only two projects, Shogo City Plaza and Shanghai Golden Eagle International Shopping Centre along Nanjing West Road, launched in 2004. The limited supply will lead our retail rental indices to keep rising steadily. Furthermore, it can be estimated that large-scale retail projects built in the residential communities will dominate the supply in the secondary city centres next year.
The Chinese government is taking measures to establish a real estate security system to overlook this fast growing sector. The increase of the domestic and foreign funds investing in China’s real estate market will speed up its law-making process, which is anticipated to attract more local and foreign investors. Institutional investors will play an important role on the investment market due to the tightening of bank lending rules to developers.
Albert Lau is managing director of Savills
China shops for success
The development of the real estate market in China was closely related to economic reform policies. Shanghai is the city which can be best used to demonstrate the latest developments in the Chinese real estate market.
Accumulated Grade A office stock in the city reached 2.95m2at the end of the third quarter of 2004. There has been a very low level of office supply, representing only 190,000m2 of Grade A quality offices, the lowest for the last eight years. Consistently low volumes of office supply over recent years drove down the vacancy rate to 7.5% by the end of the third quarter.
The city is experiencing record levels of new supply of shopping malls this year, with a total of 458,480m2 scheduled to come on stream. However, amongst these, only two projects are located in the traditional shopping nodes (namely, Nanjing East/West Road, Huaihai Middle Road and Xujiahui). One is known as Shogo City Plaza (Nanjing West Road) and the other is Shimao International Plaza (Phase I) (Nanjing East Road). Combined, these add retail space of 133,480m2 to the supply pipeline.
However, a majority of the new supply of shopping malls over the next few years will be in the emerging residential areas of Shanghai and are designed to cater to the burgeoning middle class residential populations in these areas. More demand in 2005 is expected when the government releases all restrictions on foreign partners in the retail sector, in compliance with WTO regulations.
In Beijing, the total Grade A office supply in the first three quarters this year was 716,800m2 and the Grade A stock stood at 5.25m2 at the end of the third quarter 2004. The vacancy rate for Grade A office space was 12%, a five percentage point reduction year on year.
The retail market in the capital city remained active during the first three quarters of 2004. Some famous international retailers, such as Carrefour, Seven-Eleven, Leroy Merlin, Metro and B&Q have announced that they will expand their retail market shares in Beijing by opening more branches.
Accumulated foreign investment on the Shanghai real estate market amounts to $12bn (e 9.2bn), accounting for 21% of the total foreign investment in Shanghai in 2003.
Local and overseas developers started to compete on the same platform in December 2001 when the real estate market was opened up to development and investment.