China's Sluggish Commercial Realty Market Attracts Bargain Hunters
China’s battered commercial real estate market is expected to attract more bargain hunters this year after prices were crushed by a slowing economy and swelling supply. That’s according to Colliers International Group Inc., which says prime office values tumbled about 30% from their pre-Covid high in some of the nation’s major cities. “Given how deep prices have corrected, there are lots of bargain-hunting opportunities," said Jimmy Gu, a deputy managing director and co-head of capital markets and investment services at Colliers. “It all depends on buyers’ outlook for the economy." Grade-A offices in Shanghai and Beijing used to be sought after by global real estate funds, making them more attractive than those in New York and London. Even in recent years, they largely avoided the challenges crushing global peers, such as rising interest rates and hybrid work arrangements. But institutional investors have been selling such assets as prospects for the Chinese economy and oversupply weigh on the sector. That’s added to the gloom in the nation’s real estate industry, which has been grappling with an unprecedented slowdown in its residential market since 2021. Prime offices in Beijing and Shanghai, China’s two biggest cities, traded at capitalization rates of about 5% last quarter, the highest in more than a decade, Colliers data show. A rise in the cap rate, which is a property’s net income divided by the transaction price, usually signals a decline in real estate values. “The investment yield increase became especially evident last year," said Gu. “We’ve come to a buyer’s market." Part of the drag on prices has been caused by global real estate funds that faced pressure to exit their investments after Covid delayed the process, Gu said. Falling rents and a global trend to pare exposure to office assets also contributed. In Shanghai, office rents shrank to the lowest in almost a decade last quarter, and they may decline further this year on a bigger supply pipeline, according to Colliers. In Beijing, net absorption of office space — a measure of occupancy — has only recovered to a third of the pre-pandemic level, signaling weak demand. Bargain hunters, who are mostly private entrepreneurs and high net worth individuals, have started to buy the dip, leading to a rise in smaller deals, Gu said. Nowadays, more than 80% of completed commercial property transactions are less than 1 billion yuan ($139 million), while in previous years only about half were under that size. In Shanghai, a local software provider last month purchased a suburban office project for 380 million yuan, mostly using its own funds. In Beijing, a liquor maker said in November that it plans to take a key office project near the foreign embassy district from Soho China Ltd. Notable transactions outside of the office sector including a local cement manufacturer’s purchase of Bulgari Hotel Shanghai in November for 2.4 billion yuan. And two coal barons from Inner Mongolia bought three towers of upmarket serviced apartments in Shanghai’s Lujiazui financial district for 4.1 billion yuan. Another bright spot is shopping malls in so-called tier-2 and tier-3 cities. Valuations of such assets are being supported by their inclusion in China’s public real estate investment trust pilot, according to Flora He, an executive director on valuation services at Colliers in China. “If more green shoots emerge in the economy, there’s a chance transaction volume will recover further this year," Gu said.
Tags : bargain-hunting opportunities Bulgari Hotel Shanghai Jimmy Gu Soho China Ltd