What property trends are emerging from China’s Covid-19 battle?

Slowly but surely, China is emerging from a lockdown first enforced on 22 January in Wuhan, the epicentre of the Covid-19 crisis. Roughly 95% of shops have reopened. People can visit restaurants in small groups. Life is starting to get back to normal. But as China returns to reality, Europe, the UK and the US remain gripped by the spreading coronavirus crisis. And many are now looking to China not just for lessons on how to leave lockdown but also a sense of what a post-Covid-19 world can look like. That goes for real estate players, too. For James Shepherd, Cushman & Wakefield’s head of research for Asia Pacific, some trends are already near certainties. The rate of real estate investment volume growth is linked closely to construction expenditure in mainland China, Shepherd says. In February, this saw a “sharp contraction” as construction projects were put on hold. Following the Chinese government’s “tough clampdown on debt to the real estate sector” in recent years, construction activity has mostly focused on residential development. As construction activity resumes, housebuilding will “once again take priority”, Shepherd says, while office and retail projects will take longer to kickstart.  As a result, development pipelines over the next five years will be “reduced significantly”, and delays in project completions are likely. “This should be good for foreign investment as a potential surge in the development pipeline was a major concern over 2019,” Shepherd notes.  The decline of co-working  Following a long stint of remote working as a result of lockdown measures, many companies are increasingly confident that they not only have the technology for staff to be able to work from home, but that businesses can operate effectively in such a way.  “All of this is fuelling business interest in exploring these trends further, as well as driving remote working technology,” Shepherd says.  Office consolidation programmes may now ramp up, Shepherd adds, as businesses look to find cost savings as a result of a tougher economic climate in a post-Covid world.  Demand for co-working space has decreased during the pandemic, Shepherd says. Co-working operators have backed out of new leases in Shanghai, he adds, and there have been four major co-working closures in Hong Kong during the first three months of the year. Investors roll the dice In the midst of China’s lockdown during February, C&W asked 122 Chinese investors whether the pandemic would change their investment strategy. The results, according to Shepherd, were optimistic: 99% said they would keep investing in mainland China and 62% said their investment plans in the region remained largely the same. However, Shepherd doubts there will be notable investment activity in the region anytime soon. “We do not expect to see any significant transaction volume recorded until Q4 2020,” he says, at which point it will be “a story of extremes”. Investors will either close in on well-leased offices in prime locations, Shepherd says, or roll the dice and take on higher risk with distressed assets, the price tags for which will likely be slashed. Hotels and retail assets will be of interest to investors if there is an opportunity for repositioning. Meanwhile, the disruption caused to the markets could be an opportunity for foreign investors to take on Chinese real estate opportunities, Shepherd says. “Longer term, we expect to see the Chinese government will wish to take a second look at clamping down on debt, and when this has happened in the past, it has tended to make the mainland China market more attractive to foreign investors.” To send feedback, e-mail lucy.alderson@egi.co.uk or tweet @LucyAJourno or @estatesgazette