Shanghai remains top destination for real estate investors

Shanghai remains the most important real estate investment destination in the Chinese mainland and a gateway city for international investors, a major report said.

As China's financial hub, Shanghai has maintained its standing as a favored destination for investors by concluding the most cross-border deals in the country, a real estate forecast report called Emerging Trends in Real Estate Asia-Pacific 2020 jointly published by the Urban Land Institute (ULI) and PwC said.

Despite concerns over trade tensions between China and the US, overseas investors are flocking to Chinese real estate markets. Shanghai in particular is viewed as a gateway destination by global institutions which believe they must have a presence there in diversifying their portfolios.

The commercial real estate transaction volume in China hit a record high of $25 billion in the first six months of the year. Shanghai alone contributed $10.9 billion of the total, which made the city the fourth most liquid worldwide after New York, Tokyo and Paris, the report said.

The significant increases in the number and size of transactions are in stark contrast to a few years ago, when foreign investors often had trouble landing deals in China's major cities.

Sino-US trade friction and Beijing's regulatory tightening on domestic bank and non-bank lending have led to foreign funds finding prices that are now lower and assets are more available, giving a further boost to foreign investors, said Sally Sun, PwC China Assurance Partner.

This is a sharp reversal from the situation of only a few years ago, when foreign funds could not compete with domestic capital which viewed the local market through a different prism from a risk or reward perspective. In 2018 and 2019, the majority of prime commercial property deals in the city involved a foreign buyer.

In terms of investment and development prospects though, Shanghai has fallen behind Shenzhen in this year's report. The southern city ranks sixth while Shanghai ranks seventh.

The report said the central government continues to push forward its template for development of the Guangdong-Hong Kong-Macao Greater Bay Area. This is a megalopolis consisting of 11 cities which includes Hong Kong and Guangzhou. It has already seen massive investment in its infrastructure and increased the importance of Shenzhen.

"It (Shenzhen) is one of the most dynamic cities in the world, and it is well positioned within the GBA because of its new focus on software and finance and its improved transport links to other cities in the area," said Albert Chan, chair of ULI Chinese mainland and director of development planning and design with Shui On Land.

Another southern Chinese city expected to be a major beneficiary of the GBA is Guangzhou in Guangdong province, which has seen its ranking at ninth in terms of investment and 13th in development prospects this year.

With its integration helped by new high-speed rail links to Hong Kong to the south and to Beijing and Shanghai to the north, Guangzhou has seen benefits from all the infrastructure investment in the area, the report said in citing one investment adviser.

The Chinese office sector has been the asset class hit hardest by the trade friction although investors continue to selectively target assets in the biggest destinations.

"We prefer to invest in the first-tier cities, where we tend to see higher levels of growth, greater levels of liquidity, and larger opportunities. Cities that have the most innovative companies, particularly oriented toward the technology sector, are where you have the highest growth," a fund manager was quoted as saying by the report.

Singapore, Tokyo, Ho Chi Minh City, Sydney and Melbourne are ranked as the top five markets for investment prospects, reflecting investor preference for regional markets that are large, liquid and defensive.

Ho Chi Minh City is the only exception in the top five markets as an emerging market being viewed favorably due to its strong economic growth as it absorbs Chinese manufacturing capacity moving offshore.

"Affected by external factors such as a slowing economy, concerns over ongoing trade friction, and a tighter regulatory environment, we need to be a little bit more cautious in investing in the Asia-Pacific. However, China, especially first-tier cities, still remains favored destinations for foreign investors," said Sun with PwC.