Our Global Capital Flows research from the first quarter of 2013 suggests that Shanghai is well on its way to becoming a top destination for commercial real estate investment. In 1Q13, the city grew to become the sixth most active real estate investment market in the world, with a total of US$ 2.4 billion in transactions while in the same period last year, Shanghai ranked 19th globally. If we break down transaction volumes further to just cross-border investment, excluding domestic deals, Shanghai’s performance in Q1 was even more impressive, ranking fifth in the world and surpassing regional rivals Hong Kong and Singapore in total deal volume. Shanghai’s strength was underpinned by strong investment demand across Mainland China, which passed Australia and Hong Kong to become the sixth largest investment market in the world in the first quarter.
At first glance, the flood of international capital into Shanghai seems to come at a strange time. Pessimism about China’s economy became more widespread in recent months after disappointing economic performance in the first quarter. A slowdown in expansion by international businesses has caused rental growth in Shanghai’s office and retail markets to slow, and rising residential prices, disappointing consumption levels and weakening retail sales growth all provided fodder for China bears.
It therefore may seem counterintuitive that some of the largest and most respected global investors are increasingly favouring Shanghai as a destination for capital. Several of the leading global private equity firms have recently made large purchases in Shanghai. Both Blackstone and Carlyle, for example, purchased office properties in the Shanghai CBD in the past two quarters. So why are these players so optimistic about the medium-to-long term prospects for Shanghai?
My hunch is that most of these investors have looked beyond the short term negativity caused by a slowdown in the pace of China’s growth and are concentrating on the big picture. Right now, they have the opportunity to purchase property in the financial and economic centre of what is by far the fastest growing large economy in the world. Even if China’s economy slows from 8% growth to 7% growth in the next few years, 7% growth still beats prospects in Europe and North America by a wide margin. On top of that, prime office yields are higher in Shanghai than in New York, London, Tokyo, Paris, and Hong Kong, meaning investors in office assets, Shanghai’s most popular sector, can lock in strong returns while also capitalising on future growth prospects. Despite negative headlines about the state of China’s economy, the upside potential here will continue to drive increasing investment in real estate assets.
About the author
Daniel Odette is a Senior Analyst in Jones Lang LaSalle’s research team in China, based in Shanghai.