Savills

Publication

HEADWINDS & OPPORTUNITIES-China Property Market 2018 Review and 2019 Outlook

HEADWINDS & OPPORTUNITIES-China Property Market 2018 Review and 2019 Outlook

2018 proved to be a challenging year for China economically as the government got serious about tackling some of the imbalances in the economy that have persisted in recent years—chief among these was the financial de-risking by cracking down on informal lending channels while also restricting credit availability in order to deleverage the corporate world. This would have proved challenging and painful at the best of times, but it was exacerbated by the start of a trade war with the United States. In addition, the greater regulatory oversight of tech companies and weakness of the stock market and you would expect the economy to be in freefall; nevertheless, while there is continued weakness in a number of smaller cities, leading first- and second-tier cities have remained firm.

Office markets from Beijing to Guangzhou and Chengdu have seen vacancy rates falling and rents improving while others—seeing excess supply—have found it more difficult to increase rents.

Retail markets continue to struggle with rising competition from numerous online or omni-channel competitors, but the more experienced are reinventing their value proposition by continually changing their tenant mix, introducing hot new brands and experimenting with technologically advanced interactive displays and working with, rather than resisting, online platforms.

The logistics market continues to go from strength to strength, with a rise in parcel deliveries and increasing demand for quality and timeliness, as well as expansion to cross border ecommerce and cold chain logistics as FMCG sales are increasingly online.

Hotels have not only seen a renaissance in boutique experiential travel and wellness, outdoor and sports-related segments but also in city centres younger, more modern segments of leading cities like Shanghai where occupancy rates and ADRs are starting to rise.

The residential market continues to yoyo back and forth, not only on depending on the policy environment but also the availability and cost of mortgages. As pricing flatlines and volumes fall, overextended developers are finding themselves desperate for a white knight or a change in policy. The residential leasing market has overheated with too much money deployed into immature operational platforms to service a relatively new market that is still too small to accommodate the sudden surge in supply.

Investment was sluggish at the start of 2018 but picked up towards the end of the year as developers were rushing to meet sales targets and investors were desperate to deploy raised capital. Domestic insurers and foreign funds have a larger share as domestic funds find financing more challenging and returns fail to meet expectations. Should the real estate market continue to cool in 2019, many investors are hoping to pick up distressed opportunities or diamonds in the rough amongst the rising NPL portfolios.Niche markets, especially the healthcare and data centre sectors continue to attract interest from investors seeking higher returns and less competition, though they come with higher risk profiles and a longer investment horizon more appropriate for PE, developers and insurance companies than funds.