FOREIGN INVESTORS DOMINATED SHANGHAI COMMERCIAL PROPERTY MARKET

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Cushman & Wakefield, the world’s largest privately held commercial real estate services firm, has published the Shanghai Investment MarketBeat Report for Q2 2015. According to the report, Shanghai’s gross domestic product (GDP) experienced steady growth of 7.0% year-on-year in the first half of 2015. Growth of investment in new office and retail development were 37.4% and 21.5% year-on-year, respectively, over the first six months of 2015, while residential investment experienced more modest growth of 7.8%.

Foreign investors played an active role in the Shanghai investment market during the first half of 2015, contributing to over 60% of the major en-bloc transaction volume. Compared with last year, in which approximately 70% of major en-bloc sales transactions in Shanghai were by domestic investors, the first half of 2015 witnessed an increasing number of deals by overseas buyers, including U.S.-based Blackstone Group, Singapore’s Mapletree Greater China Commercial Trust (MGCCT), and Hong Kong investors such as AVIC Joy Holdings, BM Holdings, and Shun Tak Holdings. Mark Suchy, Director, Capital Markets for Eastern China at Cushman & Wakefield, pointed out that recovering rents in the Shanghai office market have helped attract capital from abroad. Foreign investors often enjoy lower borrowing costs than their domestic counterparts, giving them a sufficient competitive edge to be able to take on high-priced projects.

Compared with last year, the first half of 2015 witnessed an increased number of investments in mature properties as opposed to projects under development. For instance, U.S. private equity firm Blackstone purchased an iconic mixed-use retail and commercial developments in the Hongqiao CBD, L’Avenue; while MGCCT acquired a landmark business park development in Zhangjiang, Sandhill Plaza, both in the second quarter. Given the recent rental recovery in the CBD, and continuing strong rental growth in the mature business parks markets, well-located projects in these markets are particularly attractive to investors.

James Shepherd, Executive Director and Head of Research & Consulting for Greater China at Cushman & Wakefield, foreign capital is expected to continue to dominate the Shanghai en-bloc office investment market over the remainder of 2015, while domestic investors will primarily purchase for their own use. Given the presence of an increasing number of well-known foreign buyers in the commercial property market, enjoying lower financing costs than their Chinese counterparts, the trend of growing foreign investment is anticipated to continue against the backdrop of a stable outlook for the commercial real estate market. James Shepherd also expects that the advent of real estate investment trusts (REITs) in mainland China may provide a new vehicle for domestic enterprises to access financing and ease cash flow pressures. The central government granted approval for developer China Vanke to launch the mainland’s first REIT product, Penghua Qianhai Vanke REIT, which was listed on the Shenzhen Stock Exchange in June and received a stronger than expected investor response. Mainland REITs do not currently offer the tax benefits conferred by many overseas REITs; however, we expect that the gradual development of these products will ultimately provide attractive new financing channels to developers in China.