The Chinese economy has been making a lot of headlines recently, as concerns grow about the country’s general slowdown and stock market/currency gyrations. Anybody reading these headlines from a distance would assume that China’s property markets must resemble tumbleweed-strewn Slough in 2009.
But before looking at the property markets in more detail, it is worth putting the economic headlines into context. Firstly, the Chinese government is deliberately slowing down economic growth and transitioning the economy from one driven by construction and manufacturing to one based more on consumption and services. Most independent commentators are predicting economic growth this year of “only” 6-7%.
Secondly, the casino-style Shanghai stock market has indeed fallen substantially since July. It is, however, flat so far this year. Moreover, China’s stock market doesn’t reflect the fundamentals of the country’s economy. Nearly two-thirds of its stock market capitalisation represents government holdings in listed state-owned enterprises.
Thirdly, it is also true that the Chinese currency, the yuan, has fallen by 3% against the dollar recently. To put this into context, the Japanese yen is down by 35% against the dollar since 2012.
Fourthly, some of the recent attempts by the Chinese authorities to stabilise the market may look clumsy, but their track record of producing economic growth is second to none and their capacity for fiscal stimulus should the economy overcorrect is significant.
Similarly, sensational stories about “ghost towns” do not represent the day-to-day reality of doing real estate business in China.
Nothing prepared me for the sheer scale of development in China when I first went there in 2008. Cities were being built in front of my eyes along with roads, bridges, dams, airports, ports and everything else imaginable.
There has been a marked change since those heady days, a result in part of slower growth and in part from the government’s austerity measures. But despite the change in mood, the real estate markets are still extremely active.
Commentators often focus on the amount of property supply in China, but what is actually remarkable is the amount of demand, which has changed over the past 18 months but remains robust. In the office sector, demand is coming mostly from Chinese companies looking to expand and upgrade their premises, but also from Western companies determined to penetrate this vast market. Shanghai, for example, has a healthy level of supply and a large development pipeline. But take-up has averaged 9m sq ft per year over the past five years.
There is oversupply in second-tier cities but, again, these markets need careful analysis. Often, in among millions of square feet of empty offices, the best buildings are jammed full of tenants and rents are rising.
There has also been a change in the retail scene, with much less demand from luxury retailers – a result of the austerity drive – but much more demand from middle-market retailers cashing in on the rapidly growing Chinese middle class.
The industrial market is also changing: demand from manufacturers is down but demand from logistics operators is up, as they respond to the surge in online retail.
The residential markets have had a cycle within a cycle. They were booming in 2011, were curtailed by government intervention to prevent bubbles in 2012 and have now reached equilibrium, with sales gaining momentum and prices stabilising.
Trying to sum up the property markets of China in a few paragraphs is a bit like trying to sum up in a single sentence the markets of Falkirk, Sheffield and Mayfair. As ever, it comes down to a city-by-city, street-by-street and often building-by-building analysis. But, generally speaking, the property markets in China feel a lot more buoyant than many headlines would suggest.
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Alastair Hughes is chief executive, Asia-Pacific, at JLL
