Knowledge Hub

As China benefits from being “first in and first out” of the COVID-19 pandemic, it has become increasingly attractive to investors both locally and from around the globe. In response, as a joint effort of our Research, Valuation and Capital Markets teams, in late 2020 we conducted an investor intentions and cap rate expectations survey, collecting valuable responses from mainland China’s largest commercial real estate (CRE) investors, both domestic and international.

The survey results revealed strong investor interest in China’s Tier 1 cities – especially in office assets in Beijing and Shanghai, as well as growing interest in business parks. Investor interest in retail assets also remained relatively solid, driven by China’s rapid recovery from the pandemic. Not surprisingly, the majority of survey respondents also demonstrated interest in logistics and data centers in Tier 1 and surrounding satellite cities. Among the major Tier 2 cities, Hangzhou – China’s rising tech city and provincial capital city of Zhejiang, emerged as the top choice, followed by Chengdu.

In terms of cap rate expectations, cap rates for CBD office properties in Beijing and Shanghai will likely remain low in 2021, ranging between 3.9% and 4.6%. In contrast, office cap rates in Shenzhen and Tier 2 cities are expected to rise slightly. For retail investments, cap rates are expected to stay relatively steady in Shanghai, Guangzhou and the major Tier 2 cities, while an uptick in cap rate is likely in Beijing and Shenzhen. In addition, cap rates of business park properties are anticipated to remain stable across all major cities in China, while most respondents expect further compressions in cap rates of logistics facilities and data centers in and around Tier 1 cities.

Key Takeaways

1. Co-investment is a nifty tool of capital management that delivers efficiencies to both LPs and GPs.
2. A Category I / II AIF is not permitted to invest more than 25% of investible funds in a single investee company. This restricts the formation of dedicated co-investment vehicles.
3. The IFSCA issued a circular in late 2020 permitting AIFs in GIFT City to disapply the 25% diversity requirement subject to certain conditions.
4. More recently, SEBI released a consultation paper on the concept of ‘accredited investors’, which contemplates an enhanced degree of flexibility (including on the diversity requirement) for funds populated solely by AIs.
5. These new measures are likely to facilitate the proliferation of co-investment activity in India.

Manufacturing property as an asset class is rising in importance as more new or rejuvenated production locations outside of China emerge, with transactions of manufacturing assets growing 19% p.a. since 2011.

In the logistics sector, online grocery sales – the fastest-growing category of online retail sales in Asia Pacific – is predicted to rise 30% p.a., driving demand for last mile delivery facilities.

In this report, we examine:

• China Plus One strategies and the opportunities for industrial property occupiers and owners
• Opportunities in the last mile and cold chain segments of logistics networks
• The most attractive cities in Asia Pacific for industrial occupiers and owners
• Investment trends in key markets

Most major regional economies continue to make steady progress after a devastating 2020 and ‘reform and recovery’ should emerge as the key themes of the year. While a smooth transition to normality is not assured (as India has shown) a pick-up in transactions volumes suggests a growing confidence among regional real estate investors as Asia continues to outpace both Europe and the US.