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France Houdard
Executive Managing DirectorCushman & Wakefield Greater [email protected]: (86 21) 2320 0878General:(86 21) 2320 0808
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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
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
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
* Compound Average Annual Growth
Source: China National Tourism Administration, World Travel Association
Chinas Domestic Tourism 2000-2015FChinas Inbound Tourism 2000-2015F
* Compound Average Annual Growth
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
Source: Cushman & Wakeeld Analytics
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.
Opportunities for overseas investors:
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
Source: Cushman & Wakeeld Analytics
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.
Purchaser Vendor Project Area(Sq.M.)
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.
Opportunities for overseas investors:
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.
Purchaser Vendor Project Area(Sq.M.)
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
Source: Cushman & Wakeeld Research
Beijing Shanghai
Grade A 7%-10% 6%-9%
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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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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