MIPIM Special Series—Part One: Focus China

Associate editor Eliza Theiss presents a focus on real estate investment in China, the first in a three-part series of reports on worldwide real estate based on presentations at the MIPIM world property market in March.

Associate editor Eliza Theiss presents a three-part series of reports on worldwide real estate based on presentations at the MIPIM world property market in March.

By Eliza Theiss, Associate Editor

“We believe in the long-term growth story. We don’t believe there’s going to be a hard landing in China,” declared Stuart Grant, senior managing director & head of real estate asset management for Asia-Pacific at The Blackstone Group. Grant spoke during the “Mastermind Asia” panel at the MIPIM world property market in March. That optimism and belief in the Chinese market, especially as a prospective area for long-term investment, was echoed throughout the four-day international property conference and trade show.

In fact, Reed MIDEM, the organizing body behind MIPIM and MIPIM Asia, itself expressed optimism in announcing there will be a special China-centric event, dubbed MIPIM China, starting in 2014.

It’s not hard to see why China is touted as the Promised Land for real estate development and investment, especially if its market indicators are compared to those of the United States or the Euro zone. Europe has an estimated 19 million unemployed, a negative growth rate and countries struggling to lift themselves from recession—if not to prevent going completely over the cliff, as in the case of France. The U.S. picture is better, but its estimated 125 percent growth over the past decade pales in comparison to China’s 325 percent.

In fact, the country’s 1.34 billion population and US$8 trillion GDP (in 2012) make it the second-largest global economy after the United States, a position it reached in a matter of years. The speed of its rise is breathtaking: Five years ago, Beijing International Airport barely breached the global top 10 chart; it now threatens to overtake leader Atlanta International Airport. And even though the explosive growth of the country is expected to cool off some, it is still predicted to present satisfying growth numbers.

Three major trends currently characterize the country, all of them likely to persist: the rise of the middle class, continued rapid urbanization (about 50 percent of Chinese now live in urban areas) and an increase in consumption and decrease in export of China-produced goods.

Of course, China continues to be known for its challenges, including a highly politicized investment environment and a local culture sometimes quite different from the western business status quo, further complicated by the fact that it is racing through motions other markets had decades to pursue. Veterans of the Chinese real estate arena, such as Hampton Hoerter China President Bromm Cole, stress the importance of knowing the local investment and political environments, staying on top of the rapidly changing local culture and having the right local partner. A strong, trustworthy, transparent local partner is particularly important, stressed Grant. With ever-changing legislation controlling the market, and many areas of investment still off limits to foreign investors, such a partner from the highly competitive local pool of real estate players can make all the difference.

Land availability presents another challenge. Thanks to massive inland sprawls unfit for development, urban development is largely limited to the coastal regions. Where urban growth is possible, however, it reaches a scale that is hard to imagine. The megacities of Guangzhou, Shanghai and Beijing are booming, and a vast and expanding network of bullet trains is joining together second- and third-tier cities that would pass as tier one in most parts of the world. According to Cushman & Wakefield Inc. estimates, by 2025 China will have 200 cities with populations in excess of one million, and 15 of them will become megacities with an urban populations above the 25 million mark. And 350 million new urban residents will require five million new buildings, roughly translating to 40 billion square feet of new built space.

That would seem to diminish risk from a market bubble, and panelists speaking on the session China – Asia’s Destiny were not concerned it would burst and cause a repeat of the United States in 2008. Their consensus was that while a market bubble does exist, it is controlled. “China cannot risk an Arab spring” was one of the assurances given regarding the nation’s economic and market growth, although the panelists also cautioned that the Chinese government will need to keep the market and economy growing, control poverty and promote the rise of the middle class.

Picking properties

Opportunities exist in a variety of property sectors—some less obvious than others. With a middle class whose economic potency is on the rise both in the immediate future and for the long haul, those directly connected to consumer habits offer real potential, including both retail and the logistics-related properties needed to support it. Some dismiss a need for shopping malls and retail centers in China, but with the ratio of shopping malls to population quite low compared to that in the United States, there is plenty of room for growth. Furthermore, Western brands, common throughout Europe and the United States, are still expanding in China.

China’s growing middle class also has a voracious appetite for housing, a severely underserved market primed for investment. With millions flocking to dense urban areas every year, the need for housing is acute. In many areas, “if we build it, they will come” becomes “we must build it; they are here.” And urban transplants aren’t the only ones driving demand; it is also coming from upgraders—households that have reached new financial potency but cannot move to bigger, higher-end residences due to a market shortage.

Still other potential lies in the hot new market for seniors housing. One of the consequences of China’s lightning-fast economic growth is the clash between cultures, generations and the economy. While a strong stigma persists against checking older family members into nursing homes, the traditional Chinese culture of the younger generation caring for its elders within the family core is rapidly becoming logistically unattainable. One of the main reasons is the accelerated migration of the young generation into the densely populated cities. The other is the artificially inflated senior demographic due to the decades-long one-child policy. Currently, this demographic represents 20 percent of the population, which has led to a 4-2-1 family structure: Each child potentially has to care for two parents and four grandparents, a ratio that doubles in the case of couples. With the precariously low number of government-run senior homes looking and functioning like the 1950s American nursing homes and some of the new projects handled by local developers that were squeezed out of the multi-family arena and lack the know-how to make these properties successful—not to mention a reinterpretation of what caring and honoring elders means—there is plenty of potential in this sector.

Some failed developments do exist, Grant affirmed, but the stories of China’s ghost towns—those developed in recent years but uninhabited—are “a bit overblown” and located mostly in inland China, far from other settlements and opportunities. “In Asia,” Grant added, “there’s a big difference between headlines—and especially Western (outlets’) headlines—and the reality on the ground.” And China’s urbanization is favoring a move toward higher-quality development and longer -term investment. Having moved from an opportunistic to an emerging market in only a few years, it now even has pockets of core assets, such as SAR Hong Kong, which is so dynamic it is developing a second CBD: Kowloon East. Change is also happening on the regulatory front, with new title legislation under consideration.

China is changing in its approach to growth. And with a market of its immense size, that is likely to breed further change. After all, when China shifts, all other Asian markets shift, as well.

Further coverage of MIPIM:

Special Report: The MIPIM 2013 Awards

MIPIM Special Report: Global Healthcare, Seniors Housing Dynamics

MIPIM Special Report: Innovation, Reinvention, Communication: Keys to Inner City (Re)Development

MIPIM Special Report: $460M Beirut Terraces Possible First Lebanese Global Award Winner