Savills China CEO highlights market trends in 2016

The monkey is associated with vitality and wit in the Chinese culture, consequently this year, the Year of Monkey, symbolises a dynamic year. 2016 marks the first year of China’s 13th Five-Year Plan, when the “New Norm” of economy continues alongside deepening transformation of the real estate industry. What will become of China and its real estate market in 2016? Albert Lau, Savills China CEO, provides his insights as he highlights five major market trends in China.

Economy: Stabilising or slowing down?

Q: China has entered a “New Norm” featuring slower economic growth. Is it likely for this adjusting phase to end in 2016?

A: Let’s first take a look at the global economy. Europe has yet to recover and has a weakening growth prospect. In the US, some regions have seen marked improvement but many others keep struggling amid a high unemployment rate. China’s export market will continue to shrink along with dampened demand in general. Under these circumstances of a global recession, China is unlikely to avoid a further slowdown in economic growth.

Nevertheless, there is no need to be overly concerned. The Chinese government is already actively exploring new markets. The “One Belt, One Road” national campaign aims at fuelling the potential demand in Russia, mid and western Asia, and eastern Europe; while successive cuts in interest rates are expected to drive the economy by stimulating domestic consumption. China has made consistent efforts to transfer from a low-cost manufacturing, export-driven economy to a higher value-added, sustainable economy driven by domestic consumer demand. It takes time, however, to see substantial changes. We may not see major improvements in the short term, yet I have faith in the long-term prospect of the Chinese economy. A combination of political stability, social security, a solid economic foundation, the government’s anti-corruption resolution and a proactive foreign policy, as well as a traditional high savings rate, will ensure a healthier and more stable economic development in China.

Market: To sustain or stride?

Q: How do you think the economic slowdown and looser currency policy will affect the overall real estate market this year?

A: Real estate demand is closely tied to the overall economy. Both individual wealth and corporate growth contribute to the development of residential and retail properties. Despite a reserved economic outlook for 2016, the market still holds investment opportunities. I believe the real estate market will have a great year in 2016.

China is a large country where the local economy varies from city to city. Major economic bases and events are concentrated in developed coastal cities and some provincial capitals. First-tier cities in particular have had an early start. As the first beneficiaries of the reform and opening-up policy, their economies are more internationalised, open, diversified and led by the service industry. Increasingly scarce land supply, growing wealth combined with large numbers of young talents has provided ample support for real estate development, while offsetting the impacts of the national economic slowdown. At times of global financial crisis, gateway cities have always showed great resilience. London, Frankfurt and Paris all report stable economic development, while US cities such as Los Angeles and Seattle have managed to recover sooner after being hit by the crisis. These cities are wealth magnets as well as “safe havens” at times of economic reforms.

Further expectation of the RMB devaluation will fuel property purchasing activities for wealth storage. Therefore, we expect to see large transaction volumes in first-tier cities.

Policy: To buy or stand by?

Q: A number of favourable policies have been announced so far in 2016 to boost the residential market in China. What do you think are the implications on first- and lower-tier cities?

A: China’s residential market has overall been polarised in the past few years, which is also reflected in the new round of policies. While new policies are expected to support the residential market in general, lower-tier cities will be the major beneficiaries given the weight of wealth will always prevail in first-tier cities. As previously mentioned, first-tier cities are facing a supply shortage due to limited land. Diverse and stable economic growth, wealth accumulation, and attraction to talents make them hotspots of investing capital. A combination of limited supply and strong demand has pushed housing prices upwards. This trend is likely to continue in 2016 on the robust sentiment boosted by the market performance last year as well as favourable policies released in recent months. First-tier cities will expect to see a price increase of 15% to 20%. Nevertheless, players need to watch out for tightening measures if prices rise too quickly.

Lower-tier cities anticipate a good year for destocking. The government is seeking to increase liquidity and provide funds for key economy-driving sectors. As the real estate market is tied to many comprehensive industry lines and consumption, it is one of the key industries to support the Chinese economy in growing at a steady rate. Policy is simply a complimentary method, and the economic dynamics of the market remain the key. Most third- and fourth-tier cities in China have not achieved economic maturity and diversity, and rely heavily on export processing or other traditional industries. As a result, destocking in these cities tends to lag behind, especially given the current global economic recession. Therefore, the impact of new policies remains to be seen.

Retail: To turn around or stay in the battle?

Q: China’s retail industry has struggled as weak economic growth drags retail sales, with further pressure from booming online shopping. Will the market turn a corner in 2016?

A: Tourism retail will be the big winner, however offline retailing will need to meet consumers’ tastes. The physical retail market has been sluggish during the past few years, yet after some time exploring and reforming, we should be able to see some breakthrough in the retail property market this year, most notably in tourism retail. Not only does it take a different path from online shopping, it will also meet the buying habits of Chinese consumers.

In terms of tourist retail properties, people think of Disneyland and Dream Centre in Shanghai, the Universal Studios theme park in Beijing, and Chimelong International Ocean Tourist Resort in Zhuhai. These large tourist destinations attract large footfall as well as significant buying power, which help to reinvigorate core retail centres of respective cities. We expect to see a large number of prime tourist retail projects within the next five years in response to a greater demand for leisure and entertainment from Chinese consumers. Life & leisure retail projects including theme parks, creative parks, ski resorts, art centres and fun centres for kids, will become the new mainstream. Demand for luxury products will probably continue to weaken; on the other hand, creative and experiential brands will emerge and blossom. Distinctive operators can help projects to achieve outperformance.

Office: Supply-demand imbalance or boom-balance?

The global economic downturn has dampened MNCs’ demand for work space, whereas China is witnessing an increase in office stock. Will that supply be absorbed?

Albert: Office supply in prime locations remains constrained, and the key focus in 2016 lies in the expansion of MNCs’ regional headquarters. New office supply is mainly concentrated in lower-tier cities and decentralised locations in first-tier cities, while space remains limited in traditional central areas within first-tier cities. Therefore, we are facing a modest supply-demand mismatch rather than oversupply. That explains why first-tier cities such as Shanghai and Beijing are accelerating office decentralisation. Corporate tenants, in an effort to save costs and improve efficiency, are increasingly favouring space in non-prime locations, where quality space and amenities are offered at a discounted rate.

We expect to see strong demand from MNCs looking to expand their regional headquarters. Grand schemes, such as the AIIB, the “One Road One Belt” and Free Trade Zones, have the potential to increase trade and investment ties with neighbouring countries. Additionally, some MNCs enjoying good profitability are likely to consider expanding their China headquarters, which will increase office requirements.

It is foreseeable that China’s economic transformation, financial reform and real estate market development are all adopting a more professional and healthier approach. We will face ups and downs in the short term, but in the long term, future prospects are strong. 2016 will be a year of market choice where the fittest survive; our professionalism and reason will be tested. I firmly believe that a sharp sense of current market trends combined with a keen eye for opportunities will lead to great success in 2016.

Albert Lau
CEO of Savills China