Chris Brooke: Foreign Investors Must Shift Strategies In Commercial Property Investments In China

In this episode of China Money Podcast, guest Chris Brooke, president & CEO at CBRE China, discusses whether China’s property market recovery is real, and how can foreign investors make money in the crowded commercial real estate market in China.

Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt.

Q: CBRE entered the Chinese market very early in 1988. Have you seen the commercial real estate part of the market as hot as it is now?

A: As we stand here in the middle of 2012, the commercial sector has obviously grown considerably. In terms of investment volume, RMB88 billion of investment properties in the commercial property sector traded, compared to RMB84 billion in 2007. So it’s on a similar level to even the peak of the market.

During the first half of this year, we’ve had RMB42 billion. We are expecting this year to turn out similar to 2007, even though it has been a bit subdued during the first half.

Q: Since China loosened monetary policy, the overall property market looks to be recovering, is it? Or is this just a temporary blip on the way down?

A: Well, you got to distinguish the residential or commercial part of the market. In residential, sentiment has definitely improved with sales and transactions recovered to some extent. I think the government will still remain a restrictive policy around anything that will result in more speculation and a rebound in prices. So residential prices will stay stable at least until the end of this year. Obviously, the leadership transition next year means policy uncertainties, so it’s difficult to see beyond that.

On the commercial side, we still see rents increasing in major cities like Beijing. We are also seeing tenant demand moving to the western regions, like Chengdu, Chongqing and Wuhan.

Q: Where do you see the biggest risks right now in China’s property sector? There have been lots of commercial building, and there is concern that they might not attract enough people to keep them afloat?

A: I think that’s a genuine risk, particular in secondary cities or provincial capital cities. There is definitely a mismatch between the timing of supply and demand. A lot of cities are developing new CBD (Central Business District) areas and new commercial districts, and a lot of that supply are coming on simultaneously.

Another broader risk relates to what happens globally. If demand continues to be impacted by uncertainties in the U.S. and Europe, it would mean some organizations might delay decisions on expansions, which will clearly impact the demand of office space.

Q: From foreign investors’ perspective, where do you see they could most likely succeed?

A: It’s clear that the time when foreign investors can come and buy assets at relatively low price, reposition them and resale them for capital gains – those days are over.

Investors need to think about either coming in and pay true market value for high quality assets, or they have to develop their own projects. If you look at strategies employed by some Singaporean funds, such as CapitaLand and Mapletree Investments, they are clearly coming in and buying land for future hold of their fund. Flexibility is what investors need to get into their plan going forward.

Q: So they need to get their hands dirtier. But there are another set of challenges in this, particularly when you go into second and third tier cities?

A: Absolutely. There is a need for very strong local knowledge and having people on the ground, who understand the dynamics of the market. When you get into developing, there are a whole host of risks surrounding transparency of the market, the land acquisition process and bringing capital onshore, etc.

Q: Lastly, is distressed opportunity a safe place for foreign investors to get into?

A: There are obviously developers facing funding difficulties right now. I think as long as the project is backed by the right collateral and there are sufficient guarantees on how to exit, (it is feasible). There have been a number of investors injecting equities and providing mezzanine finance to get developers through their projects.

About Chris Brooke:
Chris Brooke is the President & CEO at CBRE China. He is responsible for the strategic direction and business operations of CBRE in China, and has around twenty years of experience in the real estate industry in greater China. He has advised on property development, investment and financial issues to a large group of corporations, landowners and developers, and is a Chartered Surveyor.