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Big U.S. And European Beasts Look To China And Its Love Of Digital For Future Real Estate Growth

In 2020, for the first time in history, China captured a larger share of the world’s foreign direct investment than the U.S., according to data from the United Nations. That is money spent building infrastructure, factories and opening new businesses. And where that investment goes, real estate dollars are likely to follow.

China knocking the U.S. off the No. 1 spot is for now something of a blip, a result of the Chinese economy recovering significantly faster from the impact of the coronavirus than the U.S. But that speedy recovery is attractive to global property investors, and in the medium to long term, China is set to attract a greater share of the cross-border real estate pie than it has in the past.

While it may not overtake the U.S. in terms of real estate investment in absolute terms for many decades, if ever, China has factors in its favour that will increasingly draw in global investors. Alongside the well-known gravitational pull of its demographic growth and strong economy, it is booming in areas much sought after today by global investors, like logistics, data centres and tech-led offices.


There are downsides to investing in a country with an authoritarian government and a much-publicised trade war with the United States, but some of the world’s biggest investors have formed a vanguard of investment, which is set to be followed by future waves. 

“Things recovered faster than in a lot of other parts of the world,” said Danny Phuan, Allianz Real Estate’s head of acquisitions for Asia. “China is where COVID-19 was first discovered, and the government has done a good job of containing it. There is a strong domestic consumer market there, so it hasn’t been as affected as some other countries by a drop in international trade.”

As the share of overall foreign investment into China rose last year, the share of real estate-specific capital dropped. Most years, foreign investment into China is about 45% of all global real estate deals, but that dropped to about 20% in 2020, according to data from Real Capital Analytics. But Singapore-based Phuan said the fact that the country is essentially back to normal will help the investment market in the immediate term.

“I went to China in November as I have a lot of colleagues based there, and you are able to go about your business and have meetings there almost as normal,” he said. “That makes a big difference, as it allows you to inspect assets.”

China’s GDP is predicted to come out at 2.3% for 2020, one of the only countries in the world to produce positive growth, and that figure is expected to jump to 8.2% for 2021, according to the International Monetary Fund. But that is the short term — it is the medium to long term that has drawn international investors to the country’s real estate market.

The LG Twin Towers in Beijing

In the 10 years between 2009 and 2019, total commercial real estate investment in China more than quadrupled, from $9.6B to $41.8B, according to RCA. In that same period, investment from other Asian countries rose five times, but global investment from outside Asia rose more than 20 times, from $536M in 2009 to $8.9B in 2019. Even the pullback last year to $4.6B put 2020 ahead of the $4.3B invested by non-Asian investors in 2018. While overall investment dropped, U.S. investment into China was up 84% in the first three quarters of 2020, RCA data showed. 

Big global investors like Blackstone, Brookfield, AEW, Hines and KKR have raised significant funds to invest in Asia and are putting big chunks of that to work in China. That is on top of the longstanding interest from Asian giants like Singaporean sovereign wealth fund GIC

Last year, even amidst the uncertainty caused by the coronavirus, Blackstone paid $1.1B for a 12M SF logistics park in Guangzhou in south east China, the biggest deal for a single logistics asset anywhere in the world; and GIC paid $1.1B for the 890K SF LG Twin Towers, two multi-let Beijing office buildings owned by the South Korean conglomerate LG.

European and North American pension funds are also big players, with Oxford Properties having backed logistics specialist ESR and Allianz paying €1B in a joint venture with Keppel Capital to buy an 85% stake in a Beijing office building in 2019. Last year, Allianz opened an office for its real estate division in Shanghai to expand its footprint in the country, and it wants to double its real estate assets under management in the region from 7.5% to 10%-15% in the medium term, it said last year.  

“Asia Pacific is the most under-allocated region when it comes to real estate investment, there is a high spread between where investors are now and where they want to be,”  JLL Asia Pacific Head of Capital Strategies Tim Graham said, pointing to an ANREV Investment Intentions Survey 2021 that showed institutions wanted to increase their portfolio allocation to Asian real estate by an average of 170 basis points. Almost three quarters (72%) of all investors surveyed by ANREV in that report, stated they expected to increase their allocation to Asia Pacific over the next 2 years. “And within that there is a big focus on the large regional economies like China,” Graham said.  

Nuveen's Louise Kavanagh

Japan is traditionally the top destination for cross-border real estate investors in Asia, and it kept the top spot in 2020, with investors drawn to the stability of the greater Tokyo office market and its 95% occupancy rate, and a culture that rents rather than buys homes, lending itself to a liquid multifamily sector. 

But the economic trends at play in China lend themselves to real estate investment growth, in contrast to Japan’s more mature market.

“China is still seen by many investors as a capital appreciation play and an important market over the long term,” said Louise Kavanagh, Nuveen Real Estate managing director and Asia chief investment officer. “The market here is underpinned by urbanisation and a rising middle class, and we anticipate that many Chinese cities will rank among the top globally in the coming years.”

More specifically, the growth areas of the Chinese economy play perfectly to what global real estate investors are looking for right now.

“Digital life in China is more robust and advanced than in almost any other country,” Hong Kong-based Gaw Capital chairman Goodwin Gaw said. “People do everything with their phone; they order everything from groceries to water and can have it delivered in two or three hours, and that requires infrastructure — logistics and data centres — as we move more towards cloud storage. Those sectors are thriving.”

Gaw Capital founder and Chairman Goodwin Gaw

China is also investing in the kind of technology and research and development that create fast-growing companies, which in turn attract real estate investment. The government announced in June a renewed push into investment in sectors like 5G and artificial intelligence that could amount to $2 trillion over the next five years, an investment that is occurring at the same time as the rise of fast-growing private or quasi-private companies like Alibaba, TikTok owner ByteDance and Huawei. 

“Alongside logistics, one of our conviction themes is business parks,” Allianz’s Phuan said, outlining plans to invest in schemes near major universities that comprise tenants in sectors like life sciences, tech and R&D. 

Investing in offices in China comes with significant risk: Grade-A office vacancy rates in Shanghai and Beijing are about 17%, Cushman & Wakefield data shows, partly due to the ability to get new supply built quickly in China. But working in the office investor’s favour is the fact that each city is expected to see the number of people working in offices grow by between 400,000 and 500,000 people between now and 2030, essentially a good-sized city worth of new office workers. 

The growth of domestic companies will help to absorb that space, especially affordable space on the edge of cities.

“The local companies are becoming the most important, and you are seeing a shift in these markets away from multinational corporations,” Cushman head of Greater China Capital Markets Francis Li said. He pointed to a 2020 deal in which smartphone maker Oppo pushed the button on construction of a four-building HQ in Shenzhen totalling 1.9M SF.

Of course, it is not all plain sailing when investing in a country with a political system at odds with what investors from the U.S. or Europe might be used to.

Oppo's new HQ design in Shenzhen

“For international investors looking into China, issues such as regulatory and legal hurdles, tax rates, asset size, capital controls, high onshore financing, leasehold titles [and lack of precedence on renewal] are other considerations when looking at a broader allocation and diversification into the region,” Nuveen’s Kavanagh said. 

While bigger investors who have set up offices in the country might do deals directly, most investors choose to invest with joint venture partners or through fund managers in order to have an expert local partner that understands the complexities of the market. And this complexity will put something of a ceiling on global investment into China, as it requires a level of sophistication and resource that creates a high barrier for entry for small or even midsized investors. 

And then, of course, there is the politics. Former President Donald Trump made a trade war with China a central feature of his economic policy, and while the rhetoric might not be the same, there is little sign that President Joe Biden will revert to the pre-Trump policy of accommodating China economically. And for some, this has an impact on real estate investment. 

“If an investor can move their capital freely around the world, then China should be a compelling opportunity, but the thesis is not that simple,” Gaw said. “There are still significant headwinds from the Sino-American conflict. The companies with a significant base in China, or private companies, are still continuing to invest in China, as the government makes monetary policy more accommodating to stimulate the domestic economy and attract capital. But for public pension funds, these investors have to be more politically aware and are more careful.”

But for others, a longer-term continuation of the policy of opening the Chinese economy to the world, first started in the 1980s, will be the most important factor influencing real estate decisions.  

“A more conciliatory approach towards China can help to remove some of the near-term investment volatility among U.S. investors, but concerns over the political leanings is unlikely to change as a result of the new U.S. government, as many of the lingering conflicting issues will stay,” Kavanagh said. “The fundamentals of the market and ongoing opening of the Chinese economy and liberalisation of the financial sector will underpin longer-term appetite among U.S. investors.”