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MARKETIN
MINUTES
Savills Research
China Investment Shanghai – April 2021
Savills plcSavills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.
James MacdonaldSenior DirectorChina+8621 6391 [email protected]
RESEARCH
INVESTMENT
Please contact us for further information
Savills team
Nick GuanHead of Shanghai Investment+8621 6391 [email protected]
MARKET OVERVIEWChina wide en-bloc transaction consideration provisionally totalled RMB222bn in the twelve months to Mar 15, 2021 and this represented a fall of 20% impared to the previous 12-month period. More deals may come to light in the coming months possibly improving figures by 5-10%.
China investment market had a slow start to 2021. Long-term investors and end-use buyers remain the most active at the moment. Technology companies that have seen the businesses grow rapidly in 2020 and/or have recently listed, are cash rich and looking to acquire headquarter locations to further establish their brand while secure work premises for future expansion. If suitable premises for acquisition are not available a number have acquired land plots for future development. The market also saw a rebound of interest from international funds given the country’s speedy economic recovery, historic underweighting, economic rebalancing, and potential to secure good deals as new opportunities surface in response to government debt curbs.
GRAPH 1: Transaction Volumes Of Incoming Producing Assets, 12-mth Periods To Mar 15, 2021
0
50
100
150
200
250
300
350
Mar 15,2016
Mar 15,2017
Mar 15,2018
Mar 15,2019
Mar 15,2020
Mar 15,2021
RM
B b
illio
n
Source RCA; Savills Research
Shawn RanDirectorBeijing+8610 5925 [email protected]
Anthony PuiSenior Director,Guangzhou+8620 3665 [email protected]
Ray WuManaging Director,Shenzhen+86755 8436 [email protected]
Suzie QingHead of Investment Western China+8628 6737 [email protected]
2savills.com.cn/research
12-MONTH ANALYSIS OF INCOME PRODUCING ASSET DEALSAsset class analysisOffice properties remain the focus for investors in the twelve months to 15 March 2021, taking up 50% of the total deals. Faced with weaker fundamentals and significant supply volumes, investors are paying greater attention to projects with strong rent rolls, longer weighted average lease expiries (WALEs), and industry clusters in growth sectors. Emerging locations for the time being are less favoured given the potential for significant lease-up challenges.
Retail transaction volumes fell 35% in the twelve months to 15 March 2021 as investors remain cautious. However, market saw increasing interest from international funds for retail assets with both Link REIT and CapitaLand taking up deals in the past twelve months. While the sector is faced by fierce online competition and a weakened economy, some investors may feel the sector is undervalued, given the recent negative sentiment and that there are investment opportunities both from a value perspective and sector recovery perspective if the acquirer has a strong asset management team.
The industrial/logistics/data centre sector remains one of the most highly sought-after sectors of the real estate market with investment volumes increasing 33% YoY. Most transactions are still portfolios, platforms or JV equity structure with single assets scarce, fully valued and often in less-than-ideal locations. As competition in the space intensifies, yields compress and supply increases, investors continue to move up the yield curve into riskier/niche sectors, whether that be cold chain storage with growing demand from pharma and online grocery platforms, or data centres with the rise of 5G enabled systems, ecommerce, and cloud computing. With all these asset classes the key challenges remain reliable exits, strong asset management teams / JV partners, market stability, access to opportunities, and regulatory risks.
Destination analysisInvestors continue to focus on first-tier cities with these cities accounting for 70% of transaction consideration in the past twelve months to 15 March 2021. Guangzhou was the only first-tier city to record an increase in transaction consideration. A key city in the Greater Bay Area, Guangzhou has seen retail and logistics purchases increase by 110% and 220% YoY respectively (admittedly from a low base) including some very sizeable deals such as Blackstone’s acquisition of a 70% stake in a logistics park from R&F for RMB4.4 billion.
Faced with questions surrounding office market fundamentals, investors have pulled back to core markets which offer greater liquidity and a more mature tenant base with Shanghai and Beijing accounting for 75% of office transactions. Meanwhile, as logistics yields continue to compress and opportunities remain scarce, investors scour neighbouring cities such as Nanjing, Suzhou, Dongguan, and Langfang for suitable investment targets.
Buyer analysisInstitutional investors remain the most active buyer types in the twelve months to 15 March 2021, taking up around 39% of total transaction, however the total volume took up by institutional buyers decreased by 45% YoY. Meanwhile, transaction volumes took up by end-user buyers increased by 98% YoY with buyers taking advantage of the slow market to secure better stock. Tech & finance (banks, insurance and securities) firms are the major end-user buyers.
FUND RAISING AND FINANCING ENVIRONMENTSeveral funds have been actively raising capital to deploy in the China market. Four of the 2021 vintage funds have exposure to the Chinese logistics market and are being managed by Sino-Ocean Capital, CLSA and Alpha Investment as well as a fund of funds by Generali Real Estate.
Source RCA; Savills Research
GRAPH2: Transaction Volume By Asset Type
-80%
-65%
-50%
-35%
-20%
-5%
10%
25%
40%
0
20
40
60
80
100
120
140
160
Office Retail Industrial Hotel Residential
RM
B b
illio
n
Mar 15, 2020 Mar 15, 2021 YoY
GRAPH 3: Transaction Volume By City
Source RCA; Savills Research
0
10
20
30
40
50
60
70
80
90
Shanghai Beijing Guangzhou Shenzhen Rest of China
RM
B b
illio
n
Mar 15 2021 Mar 15 2020
Source Savills Research
China Investment
TABLE 1: Notable Deals, 12 Months To Mar 15, 2021
City Project Asset type Buyer Seller Price(RMB bn)
Shanghai Greenland Bund Center T2 Office Bank of Shanghai Zhongming Bund Real Estate development 4.85
Shanghai Gopher Centre Office Ping’an Insurance Gopher Asset 4.28
Beijing GDS Shunyi Data Center Campus BJ14 Data Centre GDS CITIC PE 3.8
Beijing Future Center Office Ping’an Insurance Financial Street Holdings / Vanke 3.71
Hangzhou Euro America Financial City Tower 6 Office Gaw Capital Jiangong Real Estate 2.19
Shenzhen Saige New City Plaza Retail Huahui Group Saigexin Construction & Development 1.28
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GRAPH 4: City Transaction Breakdown Of Each Asset Type, 12 Months To 15 March 2021
Source RCA; Savills Research
GRAPH 5: Transaction Breakdown Of Each Asset Type By Buyer Types, 12 Months To 15 March 2021
Source RCA; Savills Research
GRAPH 6: Transaction Volume By Buyer Types, 12 Months To Mar 15, 2021
-65%
-45%
-25%
-5%
15%
35%
55%
75%
95%
115%
0
20
40
60
80
100
120
140
160
180
Institutional Public Private User/Other Unknown
RM
B b
illio
n
Mar 15, 2020 Mar 15, 2021 YoY
Source RCA; Savills Research
Domestic (RMB bn) YoY Cross border
(RMB bn) YoY
Office 81.4 8% 28.7 -55%
Retail 35.0 -15% 6.4 -72%
Industrial 37.7 43% 20.8 19%
Hotel 6.7 -37% 1.8 -28%
Residential 0.3 -98% 3.5 -49%
Total 161.1 -2% 61.2 -46%
TABLE2: Asset Type Breakdown By Capital Source, 12 Months To Mar 15, 2021
Source RCA; Savills Research
Shanghai
Office
Retail
Industrial
Hotel
Residential
Beijing Guangzhou Shenzhen Rest of China
Office
Institutional
Public
Private
User/Other
Unknown
Retail Industrial Hotel Residential
China Investment
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TABLE 3: Vintage Funds With Mainland China Exposure, Q1/2021
Name Status Strategy Fund size (USD mn) Fund manager
CCRE China Senior Living Fund Announced Core-Plus 29 CITIC Capital
CCRE China Special Opportunistic Fund Raising Distressed 500 CITIC Capital
ChiaTai GoHigh Urban Renewal Industrial Investment Fund Raising Core 1,430 GoHigh Capital
Everbright Ashmore Huazhu Anzhu Fund Raising Value Added - China Everbright Limited
Fudo Capital IV Raising Value Added 500 CLSA Real Estate - Fudo Capital
Generali Real Estate Multi Manager Asia Fund Raising Fund of Funds 1,100 Generali Real Estate
KaiLong Greater China Core Plus Real Estate Fund
Announced Core 2,256 KaiLong Real Estate Investment
Keppel China Logistics Property Fund Closed Opportunistic 216 Alpha Investment Partners
Savills IM Asia Fund III Announced Core-Plus - Savills Investment Management
Sino-Ocean Office Fund Closed Core 4,100 Sino-Ocean Capital
Sino-Ocean Warehouse Fund Estimated Core - Sino-Ocean Capital
Source Preqin; Savills Research
GRAPH 7: 100 Largest Developers (By Sales Volume) Newly Issued Bond Coupon Rates, Jan-Feb 2021
-120 bps
-100 bps
-80 bps
-60 bps
-40 bps
-20 bps
0 bps
20 bps
0%
1%
2%
3%
4%
5%
6%
7%
Onshore bond Offshore bond Overall
Coupon rate YoY change ppts
Source CRIC; Savills Research
China Investment
The general financing environment remains challenging at the start of 2021 as the government focuses on curbing the most egregious debt excesses in the market now that the economy is back on its feet. The three red lines is now in effect as well as bank lending limits to developers and home buyers. Seven of the top 50 developers had crossed the three red lines by mid-2020, a further 8 had crossed two lines while 26 had crossed one line and only four companies had crossed no lines. Developers are starting to feel the pressure with China Fortune (CFLD) defaulting on a US$530 million bond in March.
The largest 100 developers (by sales volumes) issued RMB187.3 billion of debt (bonds, loans, securities, etc.) in the first two months of 2021, down 34% YoY. Onshore bonds accounted for RMB41.3 billion while offshore bonds accounted for RMB91.5 billion, down by 25% and 37% respectively. Onshore and offshore bond coupon rates stood at 4.42% and 6.65% respectively.
NEWSShanghai and Shenzhen Stock Exchanges accelerated the implementation of China I-REIT
Shanghai and Shenzhen Stock Exchanges formulated and issued three major business rules in January to improve the supporting rule system for China infrastructure REIT and to ensure the orderly development of the pilot program. The three rules mainly clarify the business process, auditing standards and sale process of China infrastructure REIT. The release of rules represents yet another step closer to the launch of China infrastructure REITs.
OUTLOOKChina investment market is expected to see a pick-up in activity in the remainder of the year 2021 as the market stability and clarity gives investors greater confidence. Meanwhile the sustained de-risking campaign is likely to throw up more investment opportunities at a discount to market or which may have otherwise not surfaced. Meanwhile as work proceeds on laying the foundation for China’s first true REIT increasing certainty and the injection of new capital will give funds greater confidence that REITs represent a viable exit route.
