Shanghai, 23 May 2017 - Colliers International (NASDAQ: CIGI; TSX: CIGI), a global leader in commercial real estate services, has released a Radar Report titled China Investment Property Market: Foundations Still Firm, showing that while China’s investment property market fell in Q1, the outlook for the remainder of the year is positive. 

Andrew Haskins, Executive Director of Research for Colliers International, Asia, commented on the report: “Strong interest in undeveloped land, firm cumulative investment demand over the past twelve months and the prevalence of large, high-profile deals in Shanghai in particular suggest that Q1's weakness will be temporary. With the Chinese economy still growing rapidly and concerns easing over international trade and politics, we expect investment activity to pick up over the rest of 2017 and come close to last year's record.”

Hong Kong is expected to surpass New York as the top urban foreign property investment destination for Chinese capital in 2017. Yields on investment property in China may fall modestly this year, slightly outperforming Asian averages. Attractive investment opportunities mainly lie in office and logistics properties on the fringe of greater Shanghai, in upgrading of older buildings in central Beijing and in new offices in surrounding business parks, and in industrial estate around the Chengdu International Railway Port.

China property transactions fell in Q1, Shanghai en-bloc sales market remained active

In China, total property transactions in Q1 2017 dropped by 25% YOY to USD5.3 billion. The declines do not reflect lack of demand, but the scarcity of high-quality property assets available for purchase, with many property owners opting to hold buildings rather than sell them. In addition, Q1 was affected by seasonal volatility.
 


Shanghai specifically enjoyed a strong Q1 2017, with a 7% YOY increase in property transaction volumes. Shanghai ranked as the second-placed urban (as opposed to country) investment market in Asia Pacific over Q1, ranking close behind Hong Kong. According to Colliers' own data, investment in income-producing assets in Shanghai in Q1 2017 totaled RMB21.0 billion (USD3.0 billion). 


 
Betty Wong, National Head and Executive Director of Capital Markets and Investment Services for China, Colliers International, commented: “The en-bloc sales market has always been a barometer for the overall real estate market. Shanghai’s en-bloc investment market performed quite well in Q1, representing a good start to the year. For the en-bloc investment market in 2017, influencing factors include whether the Federal Reserve will raise interest rates and whether the Chinese government will ease capital controls. Demand will remain at a high level and prime assets available for sale will be limited in the market. Therefore, we expect that in the short to medium-term, prices will rise moderately in the investment property market and the returns will remain stable.”

Chinese property outflows stay high in Q1, Hong Kong to surpass New York as top destination

In Q1 2017, total property investment by mainland Chinese investors in Hong Kong surged 213% YOY to HKD36.1 billion (USD4.6 billion), an all-time high for Chinese investment in the territory. 

After Chinese authorities imposed capital controls in November last year, there appears to have been a decline in Chinese property investment outside Asia, but not within it. Chinese investment outside Asia stood at USD2.0 billion (down by 49% YOY), compared to Chinese investment within Asia of USD5.2 billion (strikingly up by 62% YOY). Colliers expects the process of Chinese investors shifting their focus from the US to Asian markets will continue at a moderate pace. This is due, in part to the stabilisation of the Chinese renminbi, which will lower the incentive for Chinese groups to invest abroad in order to preserve the value of their capital. 

So far, office buildings have been the most popular category of property for Chinese corporate investors. Since 2012, Chinese investors have snapped up a total of HKD50.6 billion (USD6.5 billion) of office properties in Hong Kong. However, the Chinese have also invested heavily in land sites for residential development: in 2016, mainland Chinese developers accounted for 40% of residential land value sold under Hong Kong government tender. Over the rest of 2017 and 2018, Colliers expects mainland Chinese developers to focus attention on ten residential sites for sale in the Kai Tak area of Kowloon, as well as in New Territories West and Tuen Mun.


 
Haskins explained: “Some Chinese developers and institutions already see Hong Kong as an integral part of their home market, and high Chinese investment interest in Hong Kong may be interpreted as a sign of confidence in the mainland investment market as well. We tend to think that the Chinese authorities will be willing to relax the new capital controls once they are convinced that the renminbi has stabilized. Therefore, the long-term trend of mainland Chinese companies investing in overseas real estate should soon revive - albeit with a greater focus on Asia than the rest of the world.”

Room for further growth in capital values, positive outlook of China investment property market

As China’s economic background remains firm, robust domestic demand is driving import growth while the rally in producer prices has pushed up industrial profits. With the further development of US-China relations, the chance of a trade war has diminished. Given these factors, Colliers believes that the volume of investment capital targeting Chinese property will remain high, supporting capital values and exerting further downward pressure on yields. According to Colliers’ data, property yields in the major urban centres in China remain reasonable. In the top China cities, net operating yields are 3.5-4.5% for office property and lie in the 4.0-6.0% range for retail and industrial property.


 
Opportunities by urban market


Shanghai
  • Driven by yield compression and limited opportunities in prime areas such as Lujiazui and Zhuyuan, investors are eyeing office properties with value-add potential in both the prime areas and the decentralised areas with close proximity to the CBDs. In addition, medium to small office properties (i.e. ranging in size from 3,000 to 20,000 sq metres, or 33,300 to 215,300 sq feet) in decentralised areas, e.g. Minhang’s Hongqiao CBD, continue to attract many domestic buyers for self-use purposes.
  • In logistics, driven by strong occupier demand and stable rental values, standard logistics properties on the fringe of Greater Shanghai are attractive to both developers and institutional investors.
  • In the retail sector, properties in prime catchment areas continue to attract overseas investors for stronger asset performance while those in emerging areas tend to be more appealing to some domestic and selected overseas investors for value-added potential and capital value growth.

Beijing
  • Colliers sees value-add opportunities in upgrading and renovating existing aged office, retail and hotel buildings in core areas, since Beijing has banned large-scale new commercial property development in these areas since 2015.
  • R&D offices (Business Park) and land development in decentralised areas offer opportunities, since land supply has slowed down and rents in business parks have continued to rise in recent years. Benefiting from the city’s master planning, emerging areas such as Wangjing, Tongzhou and Daxing have drawn investors’ attention, with two en-bloc transactions in these areas recorded in Q1.

Shenzhen
  • The en-bloc sales market has been quiet in Shenzhen, as wholly owned and saleable office properties in prime locations are limited, and most landlords’ expectations about prices exceed levels that buyers are willing to pay. Strata-title sales and dual lease/sale strategy are the predominant investment models. 
  • In core areas (Luohu, Futian and Nanshan Districts), investors prefer income-producing office properties with prime locations and a mature business environment. For office, hotel and retail buildings located in decentralised areas, Colliers sees easy access to the subway system as a prominent factor for investors in deciding whether to purchase or not.
  • Looking forward, Colliers anticipates a significant pipeline of new supply. This new supply should create more investment opportunities, as Colliers believes that several landlords, who own mixed-use projects with a larger amount of volume, will be willing to sell portions of their properties through the en-bloc sales model.

Chengdu
  • Colliers sees opportunities in industrial estate from the China-Europe rail freight, especially in the Chengdu International Railway Port. Currently, the China-Europe rail freight takes around half the time of a similar sea voyage, and costs approximately half of the equivalent air freight journey. Moreover, the Chengdu International Railway Port has been established as China (Sichuan) Pilot Free Trade Zone in April 2017 and become an important part of “the Belt and Road Initiative" Strategy. Since its establishment, 71 companies have entered the free trade zone with total registered capital of RMB2.05 billion (USD298 million).


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