Real estate in regional China: bubble or boom?

Real estate in regional China bubble or boom

By Alastair Hughes, CEO, Asia Pacific, JLL

Last week I was in China visiting some of the so-called “Tier 2”cities that have seen such astounding growth in recent years. Sitting behind me on the flight from Chengdu to Xi’an was an elderly couple and their grandchild – a small family who are a microcosm of the Chinese regional growth story.

In just two generations they’ve gone from subsistence farming to urban life. In the future their grandson won’t think anything of hopping on an airplane; for his grandparents it would have been unthinkable until very recently, when their children moved to better-paid factory work in a newly rebuilt city.

As we sat back to read our newspapers, the international headlines suggested that happy story might be about to take a turn for the worse. “Chinese credit bubble about to burst!” they screamed. Indebted regional governments are set to bring the Chinese economy to its knees, they warn, as vast infrastructure investment struggles to deliver the promised economic return. The markets are jittery as a result.

There’s no doubt real estate supply is ahead of demand in places like Chengdu and Xi’an, but new business and new people, like the family behind me on the plane, are arriving. That’s why we are opening a new office in Xi’an – the reason for my visit.

Xi’an’s vital statistics are impressive. It’s a city of eight and a half million people with an annual GDP of USD 71 billion, growing at 12% annually. With 62 universities and colleges it has an increasingly skilled workforce who fill the new facilities of high-tech companies like 3M, Siemens and Intel. Professional services companies, like JLL, are also growing. Our revenues and profits across China have been growing at 20% per annum since 2008 and we are employing and training more and more people.

These are strong indicators that the urbanisation needed to fill the empty apartment blocks, office space and shopping malls will continue to happen, gradually bringing demand in line with supply. It’s just that China has planned for the new arrivals in a way we’re just not used to in the West.

This was explained to me on a previous visit to China by an elderly government official. “In Scotland people lived in slums after the Industrial Revolution,” he reminded me, upon hearing my Edinburgh accent. “But we’ve learned the lessons from the West’s mistakes and have built houses and roads before the workers arrive.”

Now that the new roads, airports, housing and offices are in place, regional governments are under orders to focus on job creation. Effort is shifting from building things to filling them. Yes, the real estate skin may be too big for the body at the moment, but the body is steadily growing into it. Hence Samsung’s new multi-billion dollar investment commitment to Xi’an. Building started last year on a huge facility, which will create thousands of new jobs.

Last year in Chengdu 344,000 sqm of Grade A office space was taken up (and even more Grade B space) as businesses in the city grew and modernised. New brands absorbed one million sqm of retail units as retail sales grew by more than 15%.

If the rate of urbanisation in Chongqing (another Tier 2 city) reaches the China average, a further five million people will move to the city driving demand for office, shopping and logistics property. Market forces are steadily being applied to state-owned enterprises while private Chinese and western companies are growing, again creating new jobs and demand for real estate.

Government officials have also been told to rein back on conspicuous consumption and knuckle down to the job in hand so there’s none of the big dinners with plentiful toasting that were a feature of previous trips. The exuberance of yesteryear is gone as the boldest economic experiment of modern times enters a new phase.

Of course nobody knows exactly how it will unfold and it is bound to be a bumpy ride. All we can report from JLL is that companies continue to call in search of extra space and investors are calling us looking for deals. We need to remember that China is a laboratory quite unlike the West. In Xi’an empty apartment blocks may not be an indicator of impending doom, but rather a sign of hope that the family behind me on the plane won’t end up living in a slum.

*This article first appeared in the Asian Nikkei Review

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