sr china opportunity in crisis en

8/7/2019 SR China Opportunity in Crisis En

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France Houdard

Executive Managing DirectorCushman & Wakefield Greater [email protected]: (86 21) 2320 0878General:(86 21) 2320 0808

For more information, please contact:

CHINA REPORTA LAND OF OPPORTUNITY IN

A GLOBAL CRISIS

A R E S E A R C H P U B L I C A T I O N


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CHINA REPORT | JUNE 2009 2

A L A N D O F O P P O R T U N I T Y I N A G L O B A L C R I S I S

A C & W C H I N A R E S E A R C H P U B L I C A T I O N

C H I N AR E P O R T


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PREFACE

In this paper, we argue that while China will

experience some moderate near-term negative

impacts from the current global economic

crisis, the underlying fundamentals that made

China an attractive investment destination for

investors whether multinational corporations,

developers or investors remain just as strong

and compelling, before, throughout and after the

global nancial crisis.

From an overarching macro-economic

perspective, Chinas economy continues to berelatively insulated from the global crisis. It is

undergirded by healthy balance sheets, at the

banking, corporate and household level. The

nancial system has abundant liquidity and non-

performing loans have been drastically reduced

over the last decade. Foreign exchange reserves

have nearly quadrupled in the last four years, the

Central Bank having accumulated over USD 2

trillion in foreign reserves.

For many, the key touchstone for Chinas health

is the magic number 8: Will China succeed in

sustaining its 8% GDP growth rate? As the global

economy took a deep dive, reputed banks and

economists issued forecasts that largely ranged

in the sub-8% space, ranging between 5 and 7

percent. More recently, however, forecasts have

continued to edge upward, with forecasts from

the major established banks ranging between 7%

and 8.3%.1

In an effort to stimulate the economy through

the nancial crisis and sustain an 8% economic

growth rate China put forward a RMB 4trillion (USD 586 billion) investment package.

The stimulus package was broadly outlined to

be directed in the areas of infrastructure, rural

development, housing, technology, healthcare

and education.

Stimulus packages aside, the perennial question

around the growth of consumption within the

China economy remains a central focus, as well

as the countrys ability to migrate structurally

from a largely investment- and production-

driven economy, to an increasingly service-based

economy. At present, private consumption

accounts for 37% of Chinas economy, as

compared to 56% for Germany and 71% for

the United States.2 In looking at just retail sales

growth in the rst quarter of 2009, the gures

show a robust sustained nominal retail growth

rate of 15%.3 While gures certainly are never

a tell-all, it was interesting, if not surprising, for

many to observe China automotive sales reach2.64 million units, surpassing the United States

in assuming the worlds number 1 position in car

purchases.4

Finally, on the economic front, the great focus

and debate around the state of Chinas exports

and its potential impact on the overall economy

continues unabated. The degree to which a slow-

down in trade might impact GDP seems to result

in frequent overstatements of Chinas export

CONTENTS

1. Preface

2. Hotel Market

3. Retail Market

4. Ofce Market


1 Goldman Sachs, Morgan Stanley, Royal Bank of Scotland, UBS2 International Monetary Fund (2008)3 China National Bureau of Statistics4 China Association of Automobile Manufacturers


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dependency. By comparison, Chinas dependencyon exports is much less than its neighbors,

Singapore and Korea, and roughly equal to

that of Japan. The export-portion of GDP is

calculated based on the sum of value-add exports

(only approximately 18% of GDP), rather than

gross exports (approximately 40% of GDP).5

In summary, the broad China fundamentals that

made it a highly attractive investment destination

before the global nancial crisis show strong

signs of persistence. This includes a mix of

immense forex reserves; a colossal stimulus

package backed by a government with focused

authority to deploy; low ination; strong balance

sheets across the economy, from banking, to

corporations and the family unit; and sustained

high levels of retail growth. The economic

fundamentals aside, corporate investment drivers

that underpinned foreign investment also remain

strong: low costs; large market; and rapidly

expanding innovative resources. In the context ofa global nancial crisis, where major corporation

are facing immense pressures to reduce their

global structural costs and grow revenues, while

driving innovation and shortening product life

cycles, the China market bodes quite well in

comparison and contrast to many other markets.

It is within the above context that this paper

will examine opportunities specic to the real

estate sector. Rather than focus on all aspects

of the industry, we sought in this paper to

bring attention to the dynamics specic to

three segments of Chinas real estate economy:

hospitality, retail and ofce.

HOTEL MARKET

In recent years, China has been experiencing

an extraordinary boom in tourism demand and

hotel supply. Although the recent economic

environment has had some impact on the sector,there continues to be many opportunities.

Both Beijing and Shanghai are already the

major global hotel markets with all mainstream

international brands already present, frequently

with multiple properties/same brands throughout

the city. Beijing has become one of the largest

urban hotel markets in the world with estimated

806 star-rated hotels offering some 130 thousand

rooms by the end of 2008.6

This hotel development has not been

concentrated only in primary cities. Overall, the

hotel supply in China has been growing at over

1,000 properties per year on average between

2000 and 2008, recording 11.4% average

annual growth.7 The China National Tourism

Association (CNTA) expects that further

200,000 transient accommodation properties will

be built by 2015, including about 10,000 star-

rated hotels.

In 2008 the China tourism industry

generated over RMB 1.16 trillion in revenues

(approximately USD169 billion) with nearly 76%

generated domestically by Chinese consumers.8

This disproportionately high domestic share of

tourism revenues -- 76% -- being generated by

Chinese consumer provides Chinas tourism

market with some immunity to the impacts of

the global nancial and economic crisis that is

negatively affecting primarily the international

travel. For example, in 2008 the inbound travel

to China declined by 1.4%, however, this was

more than offset by the robust growth of

domestic travel at 6.3% over the same period.9

The extraordinary expansion of China domestic

travel is driven by the growing economy (and the

resulting business travel) as well as the massive

upward shift in disposable incomes across the

5 Deutsche Bank, UBS6 BTA Beijing Tourism Administration (March 2008)7 National Tourism Administration of the Peoples Republic of China (2000 2008)8 National Tourism Administration of the Peoples Republic of China (2008)9 National Bureau of Statistics (February 2009)


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middle class (approximately 400 million people),and an unparalleled urbanization phenomenon

(where 150 million people will be migrating

to cities in the next 6 years) that results in a

strong demand for leisure travel, particularly

from Chinas growing middle class. However,

Chinas domestic market also represents a

great potential for luxury hospitality products.

According to recently released Hurun Wealth

Report there are estimated 825,000 millionaires

in China today, owning over RMB10 million

(nearly USD1.5 million).

Over the long-term, the outlook for the

hospitality industry remains very positive. By

2015, the country is expected to rank as the

worlds number one inbound and domestic

tourism destination, attracting over 100 million

inbound overnight visitors and 2.8 billion

domestic travelers.10

The buoyant Chinese tourism market has beenattracting many hotel developers and operators,

resulting in signicant growth of hotel supply

across all hotel tiers, from luxury to budget

properties. In particular, the ve-star markets

in Shanghai and Beijing are experiencing a

major inux of supply with over 15,500 rooms

and approximately 6,000 rooms respectively

estimated to enter the market between 2009

and 2012.11 Overall, CNTA estimates that by

2015 there will be over 23,500 star rated hotels

in China, approximately 65% more compared

to 14,300 hotels in 2008.12 While this growth is

substantial, the total hotel supply is still relatively

low compared to major economies such as

the US that currently has 50,600 hotels with

4.7 million rooms, showing that China still has

potential for growth.

Hotel Opportunities

Despite current oversupply issues in both Beijing

and Shanghai, further operators are very keen

to enter and consider Shanghai and Beijing as

their primary targets in Asia. The interest of

operators is driven by the growing importance of

both cities as Asian commercial hubs and tourism

gateways to China. In 2008, Beijing captured over

17.4 million international visitor nights. Shanghai

recorded even higher inbound visitation with

more than 19.5 million inbound nights generated

by some 6.4 million foreign travelers.13 This is

just 3.4 million visitors less when compared to

New York.

Attracted by booming domestic tourism, major

Chinese economy hotel operators/brands such

as Home Inn, Jinjiang Inn and Motel 168 continue

to expand as are the international brands such as

Ibis (Accor), Days Inn (Wyndham), and Holiday

Inn Express (InterContinental).

Resort developments are also experiencing

a boom. Hainan Island, a popular holiday

destination, saw seven hotel openings in 2008.

Furthermore, many break-away resorts in

proximity to major urban areas have emerged

or are underway such as Shimao Wonderland

Intercontinental in the Greater Shanghai area,

as well as several ski resorts throughout north

China.

10 World Tourism Organization as reported by China Hospitality News (November 21, 2008)11 C&W Research12 CNTA - China National Tourism Administration (2008)13 National Tourism Administration of the Peoples Republic of China (2000 2008)


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* Compound Average Annual Growth

Source: China National Tourism Administration, World Travel Association


Source: China National Tourism Administration, World Travel Association

Chinas Domestic Tourism 2000-2015FChinas Inbound Tourism 2000-2015F


Number of Star Rated Hotels in China

Lead

Purchaser /

Investor

Vendor Project Area/Room

Count

Est.

Purchase

Price (RMB

Million)*

Location Type

Fashion

Properties

(China) Ltd.

Wise Pine (Jin

Mao Group)

Portfolio including Jinmao Tower

in Shanghai, JW Marriott Shenzhen,

Ritz-Carlton Sanya and Westin

Beijing

11,000

Various

locations

ShareAcquisition(60%-100%)

ShanghaiIndustrialHoldingsLimited

South Pacific(subsiduary ofSIIC)

Shanghai FourSeasons Hotel

439 rooms1,510

Shanghai EquityAcquisition(87%)

Open LandHoldingsLimited

Beihai Yinhe Hi-tech Co., Ltd.

GuangxiWhartonInternationalHotel

46,000 sqm /338 rooms

560

Nanning ShareAcquisition(100%)

ChinaConstructionBank (CCB)

Lai SunDevelopment Co.,Hong Kong

Ritz-CarltonHotel HongKong (forredevelopmentto office )

216 rooms467

Hong Kong ShareAcquisition(10%)

Huatian HotelCo., Ltd.

ChangchunJian Real EstateDevelopment

ChangchunHuatian Hotel

82,500 sqm /526 rooms

400

Changchun ShareAcquisition(100%)

Hotel Transactions

Opportunities for overseas investors:

Strategic investments into local chains

Acquisition of distressed assets in primary

cities

Acquisition of divested state-owned hotels/

portfolios

Resorts in proximity to major urban areas

(golf, spa, ski resorts)


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RETAIL PROPERTY MARKET

Chinas retail sales in 2008 have performed

well with 21.6% year-on-year.14 The Chinese

government is very focused on driving the

consumption portion creating internal demand

within the economy strike. The most recent

government measures include providing retailvouchers to less well-off urban families to

stimulate retail spending.

While retail sales are growing rapidly, the

amount of retail space available is growing more

rapidly still. Where total stock is increasing

more rapidly than retail sales, this tends to put

downward pressure on average rentals and

in both Beijing and Shanghai, rentals for most

centers are falling. Rentals for prime space on the

other hand have remained strong.

Source: Cushman & Wakeeld Analytics

Lead

Purchaser /

Investor

Vendor Project Area/Room

Count

Est.

Purchase

Price (RMB

Million)*

Location Type

Parkway Hotel(Singapore)

Goldman SachsGroup

ANA GrandCastle Hotel

59,000 sqm /338 rooms

400

Xi'an Acquisition

Beijing CapitalTourism Co.,Ltd.

Beijing TourismInt'l Hotel Co.,Ltd.

Qianmen JianguoHotel

410 rooms/38,000 sqm

335

Beijing Acquisition

Hunan Huatian

Hotel Co.,Ltd.

Hubei Shuanghuan

/ Wuhan Xudong

Triumphal Arch

Hotel

247 rooms

295

Wuhan Share

Acquisition(100%)

Ching ChuReal EstateDevelopmentCo., Ltd.

Shanghai JianhuaPropertyDevelopment Co.,Ltd.

Jianhua OrientalApartment(conversion tohotel)

approx. 18,000sqm GFA

280

Shanghai -Pudong

Acquisition

GuangxiYuchaiMachineryCo., Ltd.

n/a Guangxi YulinHotel Co., Ltd

143 rooms 246 Yulin Acquisition(100%)

Hunan HuatianHotel Co.,Ltd.

Hunan Branchof Bank of ChinaHK Yong Heng

Company

InternationalFinanceBuilding (for

redevelopmentinto Hotel)

To beconverted to ahotel with 500

rooms

230 Changsha ShareAcquisition(100%)

Hotel Transactions

14 China National Bureau of Statistics


Purchaser Vendor Project Area(Sq.M.)

Purchaseprice (RMB)

Location

COF III SRL Deluxe Family Co., Ltd. Chang Chun TengBuilding

20,661 339 Shanghai

Blackstone VXL Capital Ltd. ChangshouCommercial Plaza

42,000 1017 Shanghai

Major Retail Investments


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Demand continues to be rm both from brandsestablished in China and from new entrants.

In 2008, there have been a number of major

overseas retailers entering the China market,

including Marks and Spencer, a UK department

store operator whose rst store opened in

Shanghai.

A number of other overseas retailers have

announced plans to enter the market including

Berghaus, the British outdoor clothing and

equipment brand, and Central Group of

Companies, one of the biggest department store

retailers in Thailand.

Some retailers are now reviewing their China

portfolios and, after aggressive expansion,

they are selectively closing stores with poor

performance, and these include Park n Shop,

B&Q and Starbucks. Chain retail still has a long

way to go in China. In 2008, we estimate that the

top 100 retailers will account for around 12% of

Chinas total retail sales. The fact that in the US

and in Europe a single retailer such as Wal-Mart

or Tesco can account for a similar percentage

of sales to Chinas top 100 retailers, shows the

huge potential in the China market.

In 2008, there were limited investments in retail

property, not through lack of demand, but more

due to lack of appropriately priced attractiveopportunities.

Retail Investment Opportunities

Major residential developers in China have,

in some cases, built small portfolios of retail

investments, and these developers are now

keen to free up cash by selling some of these.

In addition, Chinese developers are therefore

keen to build retail, but they generally have

limited experience of creating successful retail

environments and therefore there is a strong

role in the market for overseas players with a

strong retail development or retail management

track record.


Shopping centers owned by residential

developers needing cash

Retail schemes with direct access to metro

networks

Refurbishment opportunities in established

pedestrian retail areas

Investment in Tier 2 and 3 cities with

attractive retail environmentsRole as minority shareholder and asset

manager

Gross yields for ofce property vary from 6%

to 10% at present, with higher quality ofces

which are in relatively short supply tending to

outperform in terms of rental, thus achieving

higher yields.

Major Chain Store Sales As % Of Total Retail Sales


Beijing Shanghai

Prime ShoppingCentre

7%-10% 7%-10%

Source: Cushman & Wakeeld Research

Gross yields are dened as rental income after deduction of management

fees, but before deduction of taxes divided by purchase price excluding

acquisition costs.

Gross Yields


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OFFICE PROPERTY MARKET

China major metropolitan cities were

characterized by a huge increase in ofce supply

in 2008. The Shanghai Grade A ofce space

increased by 20% this year alone (2008). The

current pipeline of projects will result in an

additional 2.7 million sq.m of ofce supply by

2011, resulting in a total supply of 5.5 million

sq.m. Beijing has experienced a relatively similar

pattern of growth and expansion of Grade A

ofce space in the last several years.

Ofce rentals have been impacted by the

nancial crisis, as decision-making within large

corporations have slowed, with expansion and

relocation decisions delayed and temporarily

postponed. As lease transaction volume

decreased, landlords became proactive to secure

existing and new tenants. As such, landlords

have reacted positively by offering more creative

leasing structures to remain competitive. In therst quarter of 2009 ofce rentals in Shanghai

fell 13.7% while rents in Beijing, Chengdu,

and Guangzhou fell by 5.4%, 11%, and 4.5%

respectively.

The prospects for the mid- to long-term forthe ofce sector are tied into the broader

economy. For Grade A ofce space, the market

is tied in large part of the demand fundamentals

around foreign investment. Per the preface, the

corporate investment drivers that underpinned

foreign investment also remain strong: low

costs; large market; and rapidly expanding

innovative resources. In the context of a global

nancial crisis, where major corporation are

facing immense pressures to reduce their global

structural costs and grow revenues, while driving

innovation and shortening product life cycles, the

China market bodes quite well in comparison

and contrast to many Western markets.

Although the China ofce market faces some

short term challenges, the mid- to long-term

growth prospects remain excellent. Shanghai

and Beijing are clearly on their way to becoming

global gateway cities to rival London or New

York, and, as such, their ofce markets willincrease in size. Ofces are still a focus of

investors and have accounted for a high portion

of investment activity in 2008.


Purchaseprice

(RMB)

Location

Asia Pacific Land Hutchison Harbour Ring Ltd The Centre 98,337 4,438 Shanghai

MGPA China Aoyuan Property Group Jinbin DragonflyBuilding

83,195 180 Guangzhou

Mapletree Motorola Motorola Tower 24,521 465 Beijing

Mountain Breeze China Central PropertiesLimited

Central Point 120,000 2,600 Beijing

CPIC Zhaotai Fengsheng Place 70,818 2,195 Beijing

Bank of East Asia Hongkong Luckman Capital Prosper Center 31,000 781 Beijing

Hainan Airlines China Central Properties Shengyuan Center 45,000 750 Beijing

CEIEC Zhongfang Jingmao Real EstateDevelopment

Power Land 42,300 800 Beijing

Sky Property Management Ltd. CapitaLand Capital Tower 107,627 3,340 Beijing

SOHO China MCC Real Estate Co., Ltd. Jinhe Int'l Tower 59,950 890 Beijing


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Ofce Investment Opportunities

We believe there are opportunities in 2009 to

acquire completed fully leased assets in major

cities from vendors who are under pressure to

sell. In addition, there are still opportunities for

specialist ofce developers from overseas at

the top end of the market especially in Beijing

and Shanghai. Overseas players still have some

competitive edge in terms of producing very high

specication buildings or working closely withmultinational occupiers in creating a build-to-suit

product.


High quality product in major cities owned by

cash strapped investors

Premium ofce products in Beijing and

Shanghai

Carefully targeted Grade A products in

secondary citiesTailor-made buildings for multinational

occupiers

Gross yields for ofce property vary from 6%

to 10% at present, with higher quality ofces

which are in relatively short supply tending to

outperform in terms of rental, thus achieving

higher yields.


Purchaseprice

(RMB)

Location

Anbang Insurance Beijing Tianrun Real EstateDevelopment Co., Ltd

InternationalFinanceCenter(EastTower)

54,380 1,590 Beijing

Shanghai POSCO E&C RealEstate Development Co., Ltd.

Unknown British Fund POS Plaza 98,130 < 2,340 Shanghai


Beijing Shanghai

Grade A 7%-10% 6%-9%


Gross yields are dened as rental income after deduction of management

fees, but before deduction of taxes divided by purchase price excluding

acquisition costs.

Gross Yields


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This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in

this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verifiedsuch information and we do not guarantee that the information is accurate or complete.

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