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September 5, 2016

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China faces headwinds in property investment

Source: Shanghai Daily | September 5, 2016, Monday | Print Edition

DOMESTIC demand drivers in the Asia Pacific region remained resilient in the second quarter of 2016, supported by further monetary easing, relatively healthy job markets and the ongoing structural shift toward services sector production.

The latter is being driven by changes in consumer preferences, improvements in technology, wage growth in emerging markets but also lower global growth.

Weaker trade volumes as a result of slower global growth, increasing trade restrictions and lack of significant liberalization agreements in recent years means that Asia’s historical drivers of capital spending and exports have taken a back seat to services based consumption and jobs.

The intense pressure on costs is also driving the corporate sector to cut back on capital spending plans and focus on efficiency gains to maintain dividend payments. The focus on maintaining payout ratios is linked to broad demographic shifts taking place in the region and across the world with a greater share of the households moving into retirement where they rely on their pensions and accumulated wealth to meet current spending needs.

The corollary of the pullback in capital spending is that jobs growth remains relatively healthy despite the weaker growth environment as corporates take on more flexible and part time labor to meet output targets.

The labor-intensive nature of the services sector vis-à-vis industrial production and manufacturing also supports overall job growth. Importantly, these broader shifts are driving changes in end-user demand for commercial real estate space with relative winners and losers between and within sectors across the region.

Although property yields across the region are at, or close to, historical lows, demand for real estate exposure in a multi-asset context is set to remain healthy in the near-to-medium term. Capital inflows into the asset class will continue to be supported by broad structural shifts across the region related to demographics and demand for income producing assets on the one hand, and excess supply of private sector savings on the other. Part of this excess savings will continue to find its way into real estate, both in APAC and in other regions (or is gradually finding its way into private real estate as in the case of Japan).

China remains leader

China’s real estate growth in 2016 is unlikely to be spectacular on a historical basis; however, The country is likely to remain one of the global growth leaders, particularly relative to the sluggish growth in developed markets.

In line with China’s growth guidance range of 6.5-7.0 percent for 2016, Chinese GDP came in at 6.7 percent in both the first and second quarter of 2016, supported by marginally improved export numbers, steady infrastructure investment, and robust consumption growth.

In the second half of this year, total retail sales of consumer goods reached 15.6 trillion yuan (US$2.3 trillion), a nominal year-on-year rise of 10.3 percent.

In particular, sales of household appliances, autos and communication appliances saw respectable growth, providing tangible evidence that stable income growth is still supporting consumer sentiment.

China’s per capita disposable income was 11,886 yuan as at the first half of 2016, and showing real growth of 6.5 percent year on year, which runs parallel to GDP growth.

To be sure, we are cognizant that China’s new normal will be reflected in slower growth, albeit on a greater base, but driven primarily by consumption and the services sector.

Total transacted value (excluding land sales) in real estate amounted to US$6.9 billion in the first half of this year, down by 50 percent from the levels of US$13.4 billion a year earlier. Foreign capital has turned more cautious in 2016 on account of currency and macroeconomic uncertainties, and a general lack of confidence in the policy environment, resulting in a pursuit of higher risk premiums. Approximately half of the total of property investments in China was recorded in the two most liquid cities of Shanghai and Beijing.

In July, China’s top leaders concluded the mid-year review of economic development and set policy stance for the second half. At least on the surface, what remains unchanged is the central government’s commitment to boost domestic demand with proactive fiscal and stable monetary policies to achieve near-term growth targets while moving forward with structural reforms that are aimed at supporting sustainable long-term growth potential.

We believe that China’s growth continues to face headwinds from the loss of momentum in real estate investment and industrial production, and the burden of unsustainable corporate debt remains a downside risk. In late May 2016, China’s Ministry of Finance stated via its website that the central government could potentially increase its indebtedness to support the deleveraging of the corporate sector and state-owned enterprise reform initiatives, especially as government debt level remain low. That is a clear sign of the severity of the issue; however, we are of the view that China continues to have a range of policy tools and headroom to navigate the increasingly complex reform agenda.

The article is written by UBS Asset Management Global Real Estate Research & Strategy.

Real Estate Special


 

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