Market Data

China Offers Opportunities Despite International Incidents

Behind the Great Wall of China, growing opportunity exists for commercial real estate investors and developers willing to take a risk on untapped markets.

U.S.-Sino relations have been strained this year, due to disputes over the crippled U.S. Navy spy plane that landed on Hainan Island, proposed arms sales to Taiwan, and China's entry into the World Trade Organization. Despite this turmoil in the two countries' political relationship, commercial real estate developers with interests in China maintain that the problems have not affected their work.

The Chinese tend to take a long-term view of relationships, according to those who have worked there, so temporary rough patches in relations between the two governments are not as important as long-term relationships between business partners. Some Chinese central government agencies might postpone a meeting for a few weeks after a political event, but overall, Americans are much more concerned about political fallout than most Chinese companies. In fact, experienced developers in China warn that Americans who use various political events as excuses not to consider doing business in China run the risk of losing out on opportunities.

American commercial real estate professionals working in China advise entering the country's vast commercial markets with common sense, caution, and patience, as well as engaging the assistance of an independent translator to help with negotiations. Getting permit approval from the Chinese government takes time, but veterans note that authorization is granted more quickly to Americans partnering with Chinese developers.

Culturally, the commercial real estate business in China is not limited: Many women work in the commercial real estate and development arenas. Although some people perceive Asia as a male-dominated region, in China, the official government policy is that men and women are equal. Many real estate development companies are owned and/or managed by women, and both sexes have equal access to bank financing. For women, it may be easier to get started as a real estate developer in China than it is in the United States, according to developers with experience in China.

Leaping the Great Wall The Chinese government owns all of the land in the country, and historically has owned all real estate. However, about 20 years ago, the government opened development opportunities for commercial properties. While the first construction boom appeased businesses in need of office space, the rush to lease or buy office buildings and retail properties has slowed. The Chinese commercial market has experienced a boom-and-bust cycle during the past 20 years, and supply has outstripped demand during the past few years.

One market segment, multifamily, is beginning to dominate the real estate market, especially in Beijing and Shanghai, as the Chinese government encourages its citizens to buy apartments. Sales continue to increase, and demand is fueled by the local economy, which is growing at an annual rate of around 7 percent.

Yet many communities in China, both rural and urban, still are untouched, and the need for commercial development is substantial. This pent-up demand offers American developers in China new opportunities, although currently there are few U.S. real estate developers working in the country.

However, there is a definite U.S. presence in China. A number of U.S. retail food companies, such as Starbucks, McDonald's, and KFC, operate in China, along with consumer products companies such as Motorola and Procter & Gamble, and manufacturers such as Buick, Jeep, and Otis Elevator.

Until recently a British colony, Hong Kong is the source for 52 percent of all foreign investment in China; most foreign real estate developers in China have come from other Asian countries. So far, there is almost no resale market for cash-flow investments, and almost all real estate investment is at the development level.

The Commercial Markets Though the markets are competitive, opportunities exist in the commercial real estate arenas in China.

Office. During 2000, the demand for office space in Beijing was strong, and vacancy rates declined to between 12 percent and 15 percent. Office lease rates increased to between $3.80 per square foot to $4.75 psf per month in class A buildings.

Last year, three new class A office projects were completed, providing a total of almost 4.5 million square feet of additional office space. However, the new supply immediately was offset because more than 7.5 million sf was leased, making 2000 the most robust year for leasing activity in Beijing's history.

Meanwhile, in Shanghai, where absorption rates are down and a large surplus of space exists, the office market saw a rental rate increase of about 7 percent, with lease rates for class A office space averaging about $1.75 psf per month. About 3.5 million sf of new office space was added to the Shanghai market during 2000.

Industrial. Industrial real estate in China traditionally has been more stable than other property types due to little speculative development in this sector. However, the face of Beijing's industrial market is changing, with an infusion of high-tech companies as tenants, which represents a significant shift away from the traditional old-economy users. Vacancy rates are at 4 percent, and lease rates in Beijing average 45 cents psf per month.

Retail. Retail vacancy rates in Beijing average 12 percent, and lease rates range from $5.84 psf per month in the Chaoyang district to more than $9.30 psf per month in Wanfujing, the shopping area next to the Forbidden City and Tiananmen Square. A big-box shopping center is in the planning stages in Beijing, which will be the first Western-style shopping center in China with big category-killer stores and ample parking.

In Shanghai, retail space did not increase significantly last year, with the average vacancy rate at 23 percent and lease rates in the affluent areas averaging between $7 psf and $8.25 psf per month.

Multifamily. During 2000, more than 21 million sf of housing sold in Beijing, an increase of 85 percent over the previous year. Sales prices for apartments average about $90 psf. Developers of low-cost housing are entitled to favorable tax credits if they maintain price levels below about $46 psf.

One major factor contributing to the growth in home sales is the availability of home mortgages. In the second half of 2000, the total value of home mortgages in Beijing exceeded about $2.5 billion.

In Shanghai, both the sale and pre-sale of multifamily units posted double-digit increases during 2000. The most popular apartments are those priced between $23 psf and $46 psf, which are affordable to the largest segment of middle-income households.

Malia Zimmerman

Malia Zimmerman is a Honolulu-based writer. Dianne Willoughby, CCIM, president of Acquisitions Research Corp. in Honolulu, contributed to this report. Contact her at (808) 521-3030 or dwilloughby@ccim.net.

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