The property and real estate sector is expected to see limited impact from this week’s Stock Market volatility in China.
The China A-share market tumbled 7 percent on January 4 amid renewed concerns over the country’s growth outlook. The sell-off was triggered by a number of factors including the Caixin Manufacturing PMI for December 2015 came in weaker than market expectations at 48.2; the RMB depreciated by 96 bps on the same day, reinforcing market concerns over further currency depreciation; growing anxiety over the resumption of IPOs that could draw liquidity from the secondary market; and tomorrow’s expiry of a bailout measure introduced by the government in July 2015 which prohibited major shareholders from selling their shares for six months.
CBRE Greater China Research said that it believes the Stock Market volatility is unlikely to have any material impact on market fundamentals. It should instead be regarded as a reflection of the capital market’s concerns over the short-term challenges facing the economy, such as overcapacity in the manufacturing sector, currency devaluation and the implication for capital outflows.
What does it mean for real estate?
Office: Rental growth in 2016 is likely to be sluggish in the face of slow economic growth and abundant new supply. Tier I cities in China will fare better thanks to resilient demand from non-traditional financial and IT occupiers. Tier II cities will face headwinds in the form of rising vacancy and a mild rental decline.
Retail: The uncertain macro-economic outlook is likely to deter retailers’ appetite for expansion. Many international retailers which have grown rapidly over the last few years are reviewing their expansion strategy, which could result in weaker demand for retail space. The growth of e-commerce will put additional pressure on bricks-and-mortar retail.
Residential: The policy environment will become increasingly supportive of the residential sector this year. Tier I cities will hold up well thanks to resilient demand and limited land supply. Tier III markets will continue to struggle amid excess supply despite authorities’ recent move to de-stock housing inventory.
Inbound investment: Some foreign investors could adopt a wait-and-see approach but the market uncertainty could also prompt more opportunistic groups to step up their search for deals. Domestic institutional investors are expected to display a stronger appetite for core assets in Tier I cities given declining interest rates and abundant market liquidity.
Outbound investment: Further currency depreciation could encourage more domestic capital to seek opportunities in overseas markets. However, the government’s attitude towards the size of overseas investments and capital outflows may limit such activity.
Frank Chen, Head of Research, Greater China for CBRE Research, wrote this column.