China's commercial real estate sector boasts a 'national team' of its own
In the year 2020, cross-border investment in China's commercial real estate market saw a significant decline, accounting for the lowest level since 2014. This trend was primarily due to regulatory tightening, increased geopolitical tensions, and a shifting investor sentiment towards risk and returns compared to other Asian markets.
According to data provided by MSCI, foreign investors deployed only US$5.8 billion in China's commercial property market in 2020, a stark contrast to the US$19.8 billion invested in 2019. This marked a drop in foreign investment's share of transaction volumes, which previously accounted for over one third of the market.
The decline can be attributed to several key reasons. Firstly, China's implementation of stricter capital controls and regulatory measures on both domestic real estate and foreign investment flows since 2019 has limited foreign investors’ ability to move capital freely in and out of China, reducing cross-border real estate investments.
Secondly, rising geopolitical tensions, particularly between China and Western countries, have increased perceived risks for international investors. The strategic risks associated with China, such as its use of export restrictions on critical materials amid trade disputes, have contributed to a decline in confidence for long-term commercial real estate investment.
Lastly, Chinese commercial real estate has experienced volatility, including debt crises among major property developers, weakening demand, and slower economic growth since the COVID-19 pandemic. Investors have gravitated towards markets with clearer cash flow prospects or improved regulatory environments, such as Malaysia or other Southeast Asian countries, which have gained attention partly for lifestyle and tax incentives despite lower cash yields.
In contrast, other major Asian real estate markets have often been perceived as offering more transparent investment frameworks, less regulatory interference, or more attractive returns in sectors like residential or logistics real estate.
Despite the decline in cross-border investment in mainland China and Hong Kong, domestic investors stepped up their involvement in the market. Last year, domestic buyers comprised 84% of investment in China's commercial real estate market, the second-highest share in Asia after South Korea. Domestic investors deployed US$30.3 billion in the market, only slightly below the level in 2019.
Looking ahead, the trend of cross-border investment in South Korea and other major Asian markets is on the rise again, suggesting a potential recovery in investor confidence in these markets.
[1] Trade restriction example reference [2] Geopolitical tensions reference [3] Southeast Asian countries' incentives reference
[1] The strategic risks associated with China, such as the use of export restrictions on critical materials amid trade disputes, have made it less appealing for foreign businesses seeking opportunities in trade.
[2] Investor sentiment towards risk and returns compared to other Asian markets, influenced by increasing geopolitical tensions, has led to a decrease in foreign finance directed towards China's commercial real estate.
[3] In response to lower cash yields in China, some investors have switched their focus to Southeast Asian countries, which offer lifestyle and tax incentives, as they look for more transparent investment frameworks or improved returns in sectors like residential or logistics real estate.
