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News Release

Beijing

Rise of Domestic Institutional Investors to Redefine Mainland China’s Real Estate Investment Market

Jones Lang LaSalle’s white paper analyzes changes and opportunities for investors


Mainland China’s commercial real estate investment market is in the throes of major structural change, according to Jones Lang LaSalle’s latest research report <The Rise of Mainland China’s Institutional Investors> released today. The report highlights significant (and inevitable) changes and opportunities that the emergence of domestic institutional companies will bring to the Mainland’s real estate investment market over the next few years, including:

• A shift in market leadership from overseas to domestic players, largely state-owned enterprises (SOEs)
• An increasingly competitive investment market where international capital will need to aggressively innovate and prove its worth to compete with increasingly active local players
• Enhanced transaction volumes and transparency that will likely compress yields in the market

Effective October 1, 2009, the new regulations allowing insurance companies to widen investments into real estate is a key milestone in a process that already started several years ago. “Mainland China’s domestic insurance companies directly entering the real estate investment market is a key step in a process that has already seen a marked shift from a foreign-dominated real estate investment market to one where domestic players have assumed pre-eminence,” says David Hand, Head of Investments for Jones Lang LaSalle China. “The Mainland’s domestic players, namely the insurance companies, state-owned conglomerates and soon REITs, are rising at the same time that foreign investors have been squeezed by the global recession.”

 “Our continued research into major transactions of commercial property indicates that over the last five years, domestic players have dramatically increased their share of the market,” says Meggie Qin, Beijing Research Head at Jones Lang LaSalle. “These findings, along with our latest report, 'The Rise of Mainland China’s Institutional Investors,' underscores the fact that China’s real estate market is set to undergo an inevitable change which can either translate into opportunities or threats for both domestic and foreign investors – depending on how prepared they are.”

In the first section, the report analyses the changing real estate landscape in Mainland China over the recent years, including the emergence of investment-grade property and the increasing presence of cross-border investors during the middle years of this decade. Much like other markets, the influx of international capital into Chinese real estate has plunged in the wake of the global financial crisis.
“In the first half of 2009, foreign capital accounted for less than 10% of major en bloc investment in Mainland China’s major markets, down from nearly 60% in 2005,” noted Qin. “At the same time, domestic investors have assumed predominance of the investment scene, accounting for almost 70% of such transactions in 1H09.”

In examining the different types of existing and emerging domestic investors, the report notes the entry of state-owned enterprises, insurance companies, government funds and likely future real estate investment trusts. Expected impacts include higher levels of competition, increased market transparency, expected change in pricing trends, and likely higher investment volumes.

The report concludes with recommendations from industry experts on how players can tackle and embrace these emerging issues and opportunities:

Upward pressure on prices: Increased competition and the “home-team” domestic advantage of Mainland institutions will support prices for commercial assets.

Foreign investors looking at new avenues: RMB-denominated funds, co-investment and the leveraging of experience and expertise will allow foreign investors to remain important players in the market.

Less speculative construction: Cooperation between institutional investors, developers, and tenants will result in better quality and higher pre-commitment levels in the market.

Significant increase in investment options: As the Mainland Chinese market grows and matures, investors will be able to enjoy greater diversification of their portfolios.

“The current situation – where foreign players are at their weakest in terms of purchasing power and domestic firms are strongly encouraged to enter the market – has the potential to become the defining point for Mainland China’s real estate market,” added Hand. “Foreign investors should not, however, be written off. We fully expect the Mainland to incorporate international capital expertise via existing and new cooperative approaches. Whichever way the tables turn, investors in general wishing to be part of Mainland China’s dynamic market should take these considerations very seriously. Under today’s new national and international market dynamics, both domestic and foreign investors are adapting and shaping the Mainland’s new investment landscape.”