SHANGHAI: The investment market turned notably more active at the end of 2009 as investment sentiment improved on the back of ample liquidity, with domestic investors the major buyers. While we expect this trend to continue in 2010, foreign investors will take an increasingly proactive stance in acquisition, backed by their increased confidence in the China market due to its prompt economic recovery coupled with their improved balance sheets.
Apart from foreign funds, several policy initiatives will also widen the sources of capital in the investment market. It is likely that the pilot scheme on REITs will be launched in 2010. The establishment of real estate RMB funds will also take shape during the year. Although the revised Insurance Law of October 2009 allows insurance companies to invest in the property market, it is worth noting that, on Jan 21, 2010, the
Chairman of the China Insurance Regulatory Commission stated that insurance funds would not be allowed to invest directly in development projects or the residential and commercial property markets. This statement may be interpreted as having a short-term negative impact on the investment market, although we consider it helpful for the development of a stable commercial market, preventing the overheating of property values, as seen in the residential sector last year.
Barring adverse tightening by the government, capital values are expected to hold firm in 2010, underpinned by the optimistic economic outlook and improved investment sentiment.
By contrast, rentals of most commercial properties will stay flat or continue their downward spiral in the year, further compressing investment yields. That said, as investors tend to be less risk-averse, their lower yield expectations will help close the gap.
Notwithstanding the yield compression, we believe that the expectation of a positive rent reversion and the appreciation of the RMB, as well as future capital gains, will be the key drivers underscoring investors’ interest in acquisitions. – Colliers Investment World
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