Bubble concerns spread to China commercial property

BEIJING/HONG KONG: Concerns about a bubble in China's residential property market are spreading to the commercial real estate sector at a time when developers are upping their exposure, and the country's insurance industry is poised to invest huge sums into the space.

While commercial prices are steady and insurance companies are watching and waiting, residential property developers have increased investment into the office sector after Chinese government measures were instituted to cool home prices.

Shimao Property, Country Garden, China Resources Land and Poly, have been increasing their investment into commercial property. Smaller developers such as Sino-Ocean Land and Gemdale are increasing commercial exposure too.

Commercial real estate investment in China will exceed one trillion yuan (RM491.81 billion) this year, up from 740 billion yuan in 2010, as developers have shifted away from the housing market, the target of nearly two years of government measures to cool the sector down.

The investment frenzy into commercial property has also been fuelled by expectations of a potentially huge demand from China's insurers, which won approval late last year to invest up to 10% of their assets in real estate, most of which was aimed at commercial properties.

But even before any major investment from insurance companies, prices of office space and shopping malls have jumped and rental yields have slipped due to speculative buying, fueling concerns of a bubble forming across the industry.

"The low investment yield does give us some concern that prices probably have gone up a lot and we need to see the income growth before we can see values going higher," said Michael Klibaner, head of China research for property consultancy Jones Lang LaSalle.

Insurers — including China Life, Ping An, China Pacific and Goldman Sachs-backed Taikang Life — have 500 billion yuan available to invest in property, based on the industry's total assets of about five trillion yuan.

That's enough to buy all top-grade office buildings in Beijing, Shanghai, Guangzhou and Shenzhen, analysts say.

But only a fraction of the 500 billion yuan has been invested so far, as insurers keep a tight grasp on their money given the concerns surrounding the sector.

Annual gross rental yields on commercial properties in major cities such as Beijing and Shanghai have fallen to 4%-6% from around 10% several years ago.

Commercial properties in major cities such as Beijing and Shanghai are now generating annual gross rental returns that are below China's official one-year lending rate of 6.56%. That means if investors borrow and plough that money into commercial property, they stand to lose because the returns won't even cover the borrowing cost.

Last month, China's banking regulator urged banks to strictly monitor risks when they provide loans to commercial property projects and set a higher criteria for approving such loans than for home mortgages.

The China Insurance Regulatory Commission currently requires insurers to submit all property transactions for its approval as it works on more detailed investment rules.

"The risk is a bit high if insurers invest in the real-estate market now. There are good reasons for CIRC to hold back the issuance of its final guidelines." said Chen Hongxia, an analyst at Oriental Securities in Shanghai.

Faced with mounting pressure to meet their long-term liabilities amid a rapidly ageing population, insurers had spent years lobbying Beijing to lift the property-investment ban.

Domestic investors are largely restricted from buying properties abroad due to China's closed capital account, forcing them to look for investment opportunities within the country.

Investment in commercial property is encouraged by China's vow to boost domestic consumption as part of its economic rebalancing.

Shirley Xiao, senior vice president of top Chinese developer China Vanke, described the commercial-property rush as irrational.

Many developers lack the financial backing and human resources needed to run office properties and malls, and China's urbanisation is far from over, boding well for the residential sector over the long term, she said.

"We don't think there is logic behind this."

A glut of commercial property is already plaguing cities such as Chengdu, Shenyang and Tianjin, analysts say.

Shopping malls are being built across the country, with some boasting floor areas of more than several hundred thousand square metres.

The rationale behind building more malls: China has much less retail space per capita than Europe and the United States. Retail space per capita in China is less than 0.5 square metres, compared with about one sq m in Europe and two sq m to three sq m in the United States.

But some analysts say this comparison is misleading, given the sheer size of the Chinese population.

In some major Chinese cities such as Beijing and Shanghai, retail space per capita is already nearing or surpassing the European and US levels.

Only large developers with easy access to bank credit and strong state parent backing, such as China Resources Land, will be successful in running large malls when there is a glut, analysts say.

It is more risky for smaller developers such as Sino-Ocean Land and Gemdale to expand aggressively in commercial property — which requires more expertise and is more capital intensive and time consuming.

And as more people shop online, it is getting increasingly challenging to run a shopping mall and make it appealing to merchants, consumers and investors.

"I think it will be a golden decade for the consumer... Whether it will be a golden decade for developers remains to be seen," said James Hawkey, executive director of retail services of Cushman & Wakefield in China. — Reuters

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