Urban Land Institute Chinese Mainland Real Estate Markets 2016asia.uli.org/.../sites/2/2012/04/China-survey_EN_WEB_2016-9-14.pdf · Urban Land Institute Chinese Mainland Real Estate

ULI Center for Capital Markets and Real Estate

Urban Land Institute

Chinese Mainland Real Estate Markets 2016ULI Analysis of City Investment Prospects

城市土地学会2016年中国大陆主要城市房地产投资前景分析

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About ULI

The Urban Land Institute is a 501(c)(3) nonprofit research and education organization supported by its members. Founded in 1936, the Institute now has more than 38,000 members worldwide representing the entire spectrum of land use and real estate development disciplines, working in private enterprise and public service. As the preeminent, multidisciplinary real estate forum, ULI facilitates the open exchange of ideas, information, and experience among local, national, and international industry leaders and policy makers dedicated to creating better places.

The mission of the Urban Land Institute is to provide leader-ship in the responsible use of land and in creating and sus-taining thriving communities worldwide. ULI is committed to bringing together leaders from across the fields of real estate and land use policy to exchange best practices and serve community needs by

Fostering collaboration within and beyond ULI’s membership through mentoring, dialogue, and problem solving;

Exploring issues of urbanization, conservation, regen eration, land use, capital formation, and sustainable development;

Advancing land use policies and design practices that re-spect the uniqueness of both built and natural environments;

Sharing knowledge through education, applied research, publishing, and electronic media; and

Sustaining a diverse global network of local practice and advisory efforts that address current and future challenges.

About the ULI Center for Capital Markets and Real Estate

The ULI Center for Capital Markets and Real Estate focuses on tracking, analyzing, and exploring real estate investment trends globally. The mission of the Center is to inform, edu-cate, explore issues, create knowledge, and foster communi-cation and networking at the intersection of real estate finance and capital markets and the diverse needs and interests of the ULI membership. The Center also seeks to address mem-bers’ interests in underlying topics such as market forces affecting property sectors and economic trends.

About ULI Asia Pacific

Across the Asia Pacific region, the Institute has more than 1,800 members, with a particularly strong presence in Japan, Greater China, Singapore, the Philippines, and Australia. The regional headquarters is in Hong Kong S.A.R., with an office in Tokyo. ULI Asia Pacific brings together industry leaders with a common commitment to improving professional stan-dards, seeking the best use of land, and following excellent practices. By engaging experts from various disciplines, the Institute can arrive at responsible answers to problems that would be difficult to achieve independently. ULI shares its knowledge through various discussion forums, research, publications, and electronic media. ULI’s activities in the region are aimed at providing information that is practical, down to earth, and useful so that on-the-ground changes can be made. By building and sustaining a diverse network of local experts in the region, the Institute is able to address the current and future challenges facing Asia’s cities.

ULI Asia Pacific is the acknowledged authority for policy information and best practices in land use in the Asia Pacific region.

Supporting principles:

Collaboration with universities, government agencies, and like-minded organizations strengthens and dissemi-nates the Institute’s expertise.

Priority initiatives effectively address local land use issues.

High-quality programs enhance the integrity of the Institute.

Substantial interdisciplinary membership is engaged throughout the region.

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No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage and retrieval system, without written permission of the publisher.

Cover image: Shanghai Lujiazui. © Huitu.

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Sponsors

Founded in 2003, Chongbang Group is a real estate investment and development group of companies, formed by a consortium of Hong Kong, Singaporean, Canadian, and Dutch investors, as well as a group of seasoned professionals.

Since its inception, Chongbang has focused exclusively on investment in and development of retail-anchored mixed-use projects in Shanghai and its neighboring cities, embarking on seven projects of this kind—five in Shanghai, one in Kunshan, and one in Hangzhou. Proj-ect sizes range from 80,000 to 800,000 square meters. Chongbang serves as co-investor; project manager; marketing, sales, and leasing manager; property and center manager; as well as asset manager of all these projects.

Chongbang is currently embarking on Phase II of its development, with additional emphasis on culture, tourism, technology, ecology, and the environment.

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PwC China, Hong Kong, Taiwan, and Macau work together on a collaborative ba-sis, subject to local applicable laws. Collectively, they have around 700 partners and 18,000 people.

We provide organizations with the professional service they need, wherever they may be located. Our highly qualified, experienced professionals listen to different points of view to help organizations solve their business issues and identify and maximize the opportunities they seek. Our industry specialization allows us to help cocreate solutions with our clients for their sector of interest.

At PwC, our purpose is to build trust in society and solve important problems. We are a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory, and tax services.

Find out more and tell us what matters to you by visiting us at www.pwc.com.

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Beijing Shine Asset Management Co. Ltd. (Shine) is a pioneering service provider of fi-nancial instruments and a thematic real estate investment fund manager in China. Shine specializes in four investment areas—low-carbon buildings, tourist real estate, senior housing, and overseas real estate. As a service provider with an asset-light strategy, Shine has as its mission leading the Chinese real estate industry reforms and investing in outstanding asset-light enterprises.

Green Private Capital Industry Chain Investment Fund (GPC) was founded by Beijing Shine Asset Management Co. Ltd., Modern Land (China) Co. Ltd., Glodon Technolo-gies Inc., and Beijing Honggao Creative Architectural Design Inc. GPC is a green financial investment fund and focuses on investing in low-carbon building projects. As an advanced investment fund, GPC has as its mission promoting the marketization and capitalization of low-carbon buildings.

Overview 2

Chapter 1: Investment and Development Prospects 6

Shanghai (1) 11

Shenzhen (2) 12

Beijing (3) 13

Guangzhou (4) 15

Suzhou (5) 16

Nanjing (6) 16

Hangzhou (7) 17

Wuhan (8) 17

Xiamen (9) 18

Zhuhai (10) 18

Chengdu (13) 19

Chongqing (14) 19

Tianjin (16) 20

Foshan (18) 21

Xi’an (19) 21

Dongguan (23) 22

Shijiazhuang (29) 22

Dalian (30) 23

Shenyang (33) 23

Selected Comments for Other Cities 24

Chapter 2: Trends in Sector Engagement 29

Office 31

Retail 36

Residential 41

Industrial/Distribution 46

Hotel 47

Chapter 3: Issues Affecting Development and Investment 51

Chapter 4: What’s New? And What Is Livable? 62

Appendix: Tax Collection Reform 72

Contents

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C hinese Mainland Real Estate Markets 2016: ULI Analysis of City Investment Prospects—the sixth in a series of annual surveys conducted by the Urban Land

Institute—reports on real estate development and investment prospects in 33 of the largest cities in the Chinese mainland, as well as key asset categories and issues affecting those prospects, as evaluated by real estate industry leaders active in the country. The survey consists of a written questionnaire completed by 81 participants, plus more than 40 individual interviews conducted from late June to early August 2016.

To reflect the level of interest from past survey participants, four cities were dropped from this year’s report—Lanzhou, Taiyuan, Urumqi, and Wenzhou—and one was added, Foshan, a city of 7 million people located next to Guangzhou.

In the approximately 15 months since last year’s survey, the housing market in most parts of the Chinese mainland has made a robust recovery, thanks to the cancellation of home-purchase restrictions and the central government’s continuing expansionary monetary

Overview

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policy that began in 2014. According to government statistics between June 2015 and June 2016, the average price for a new home increased for every city in the survey, with a median annual increase being 8.9 percent. Shenzhen, Xiamen, Shanghai, and certain cities in the Yangtze River Delta posted annual price increases of 20 to 47 percent. A significant reduction in new home inventory for most cities in the survey—the median months of new home inventory fell to just over six months in June 2016—portends that prices likely will continue to rise unless the government intervenes. Already in some overheated markets, such as Shenzhen, Nanjing, and Suzhou, the government has begun imposing more restrictive policies to dial back the housing market.

As predicted in last year’s report, cities near Tier 1 cities with high-speed railway connectivity, especially in the Yangtze River Delta, have made a strong recovery. Kunshan and Suzhou are quickly evolving into suburbs of Shanghai, and cities near Beijing, Shenzhen, and Guangzhou are increasingly attracting homebuyers from nearby Tier 1 cities, with travel time reduced to under one hour by high-speed railway or subway from one to two hours by car. Some interviewees even sounded guardedly optimistic about Yujiapu in the Binhai New Area of Tianjin, an often-mentioned symbol of China’s ghost city phenomenon, which is now connected to the traditional centers of Tianjin and Beijing via high-speed rail.

While the residential sectors of most cities have made a strong recovery, the results for office and retail sectors are mixed. The office markets in Beijing, Shanghai, and Shenzhen are considered healthy in spite of substantial new supply slated to come on line in the coming years, particularly in Shenzhen and Shanghai. These cities enjoy strong demand for office space from the information technology and finance sectors. In contrast, most Tier 2 and 3 cities continue to see a severe oversupply. In cities with

Survey Responses by Geographic Scope of Firm

Source: Chinese Mainland Real Estate Markets 2016 survey.

Global firm with a Chinese mainland investment strategy

Chinese mainland firm focused primarily on China

Asia Pacific firm focused on Chinese mainland and other Asian countries/regions

Chinese mainland firm focused on Chinese mainland and other Asian countries/regions

Asia Pacific firm focused primarily on Chinese mainland






“Survey Responses by Geographic Scope of Firm”

7.4%

17.3%

32.1%

40.7%

2.5%

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strong economic growth, especially in the IT sector, such as Nanjing and Wuhan, office markets perform much better than those in other Tier 2 cities, such as Chengdu, Chongqing, Shenyang, Tianjin, and Xi’an. In the case of Shenyang and Dalian in the northeast region, the already severe oversupply of commercial properties continues to be compounded by slow economic growth.

As discussed in last year’s report, the retail sector continues to be hurt by growing online sales and the oversupply of existing and planned shopping centers across the country. The growing popularity of e-commerce is fundamentally changing the tenant mix of shopping centers and total space requirements. Merchandise retailers’ share of space has been declining fast, with some interviewees predicting it will drop to as low as 15 to 20 percent from the traditional 50 percent or more. Many interviewees in both Tier 1 and 2 cities observed department store closings in their cities. Even the way rent is collected is fundamentally changing: because a growing portion of sales are being completed online after customer visits to stores, landlords increasingly are phasing out the collection of a percentage of sales and instead rely more on base rent.

The level of enthusiasm for the distribution/industrial sector has come down a notch since last year. The sector suffers from too much capital chasing investment opportunities and the difficulty of obtaining land, especially in Tier 1 cities. Some interviewees, however, remain optimistic about the future growth of the sector, citing a severe shortage of high-quality warehouse stock.

As for issues affecting development and investment prospects, the central government’s rollback of home-purchase restrictions and the lowering of downpayment ratios have clearly turned the housing market around, perhaps too drastically and too quickly in some cities. As is generally the case in the Chinese mainland, how the government reacts will greatly affect the housing sector. Other key issues include improvement of the public transportation system, especially in the form of high-speed railway and subway, which is increasingly blurring city boundaries between Tier 1 cities

Survey Responses by Type of Firm







“Survey Responses by Geographic Scope of Firm”

Survey Responses by Type of Firm

35.8% 24.7%28.4% 4.9% 3.7% 1.2% 1.2%

Real estate developer Real estate services firm Institutional/equity investor or

investment manager

Private property investor

Other Bank, lender, or

securitized lender

Equity REIT or publicly

listed property company

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and their neighbors. To deal with the excessive oversupply of commercial properties in most cities, a more flexible government zoning policy that allows developers to reduce space allocation for commercial use appears to be the only practical solution.

Among niche sectors, coworking space has been getting a lot of attention lately. The number of operators and locations has grown rapidly in the past year, led by the likes of UR Work, founded by former China Vanke executive Mao Daqing, and SOHO China. Also, WeWork, the largest coworking space operator in the United States, opened its first location in Shanghai during the first half of this year and also raised equity financing from Chinese investors. Dynamic economic growth, wealth accumulation, and demographic changes, plus the new two-child policy, will create more opportunities for niche sectors, such as senior housing, to take hold.

Rounding out trends reported in this report, Shanghai and Shenzhen are ranked first

and second, respectively, in terms of livability. Beijing continues to rank in the bottom half, in contrast with its reputation as having a dynamic economy and healthy real estate market. There is no way of getting around the polluted air and traffic congestion. The livability ratings for Dalian and Shenyang dropped the farthest, reflecting the poor economic conditions in these cities and in northeastern China, with no obvious sign of a turnaround.

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CHAPTER 1

Investment and Development Prospects

T his year, the four Tier 1 cities occupy the top four spots for both investment and development. The ranking—Shanghai first, followed by, in order, Shenzhen, Beijing,

and Guangzhou—corresponds closely with interviewees’ overall feedback.

A number of interviewees commented that Tier 1 cities, especially Shanghai and Beijing, offer a safe haven in case of a slowdown of the Chinese mainland’s economy. Tier 1 cities experienced some of the sharpest home price growth during the 12 months ended June 2016, with Shenzhen (47 percent) and Shanghai (34 percent) leading the way.

For many interviewees, Shanghai continues to be considered the most liquid and transparent market, offering many investment opportunities, compared with the other Tier 1 cities. Shenzhen’s dynamic economy seems to be robust enough to digest a huge new supply of office space that will double the city’s total Grade A stock to over 10 million square meters during the next two years. Beijing’s fundamentals continue to be strong, with a relatively limited new supply of commercial properties, but investors are frustrated by limited investment opportunities in the nation’s capital. Although Guangzhou is seen as the weakest of the four Tier 1 cities, its real estate market has performed well, with the average new home price rising nearly 20 percent during the 12 months ended in June 2016.

This year’s survey saw significant improvement in ratings and rankings of cities that are in the three main economic clusters. As shown in Exhibit 1-2, the eight cities with the greatest improvement in ratings for investment prospects are Suzhou, Wuxi, Hangzhou, Ningbo, and Nanjing in the Yangtze River Delta; Tianjin and Shijiazhuang in the Beijing/Tianjin/Hebei region; and Dongguan in the Pearl River Delta. In terms of development prospects, Dongguan, Shijiazhuang, Hangzhou, Wuxi, and Tianjin have improved the most.

This trend is directly caused by the strong recovery of the residential market in those cities during the past year, with strong buying from residents in the nearby Tier 1 cities. Indirectly, the cancellation of home-purchase restrictions in Tier 2 and 3 cities but not in Tier 1 cities, a substantial home-price gap between Tier 1 and surrounding cities, and the expansionary monetary policy have created conditions for strong home sales in the surrounding cities. Another significant factor is that the high-speed railway has significantly shortened travel time to as little as 20 to 30 minutes between the Tier 1 cities and some of their surrounding cities.

In contrast, cities that are not part of economic clusters, such as Nanning, Nanchang, and Kunming, saw their ratings drop significantly. The biggest drops in ratings belonged to Shenyang, Dalian, and Harbin, located in the northeastern region where the economy is performing poorly due to overdependence on heavy industry, such as steel manufacturing and extraction of natural resources.

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Abysmal Fair Excellent 1 3 51 3

Poor2

Good4 5

1 2 3 4 5

ShenyangHarbin

NanningDalian

ShijiazhuangKunming

HaikouNanchang

JinanSanya

DongguanChangsha

FuzhouQingdao

Xi’anFoshan

ZhengzhouTianjin

WuxiChongqing

ChengduHefei

NingboZhuhai

XiamenWuhan

HangzhouNanjingSuzhou

GuangzhouBeijing

ShenzhenShanghai

Exhibit 1-1 City Investment Prospects


Exhibit 1-1

City Investment Prospects, 2016

Shanghai 4.23Shenzhen 3.93Beijing 3.86Guangzhou 3.70Suzhou 3.68Nanjing 3.56Hangzhou 3.55Wuhan 3.45Xiamen 3.26Zhuhai 3.12Ningbo 3.00Hefei 3.00Chengdu 2.97Chongqing 2.97Wuxi 2.97Tianjin 2.93Zhengzhou 2.85Foshan 2.83Xi’an 2.81Qingdao 2.76Fuzhou 2.75Changsha 2.71Dongguan 2.68Sanya 2.56Jinan 2.55Nanchang 2.50Haikou 2.46Kunming 2.44Shijiazhuang 2.39Dalian 2.37Nanning 2.36Harbin 2.11Shenyang 1.97

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Exhibit 1-2

Change in Investment ProspectsRatings Change (2015–2016)

2016 2015 Change Change (%)

Suzhou 3.68 3.29 0.40 12.06%

Wuxi 2.97 2.67 0.30 11.19%

Hangzhou 3.55 3.21 0.34 10.70%

Dongguan 2.68 2.45 0.23 9.45%

Tianjin 2.93 2.73 0.20 7.39%

Ningbo 3.00 2.85 0.15 5.34%

Nanjing 3.56 3.39 0.17 5.01%

Shijiazhuang 2.39 2.29 0.11 4.73%

Wuhan 3.45 3.31 0.13 4.03%

Shanghai 4.23 4.09 0.14 3.49%

Hefei 3.00 2.95 0.05 1.74%

Chongqing 2.97 2.94 0.03 1.19%

Beijing 3.86 3.85 0.01 0.34%

Zhengzhou 2.85 2.87 –0.02 –0.58%

Qingdao 2.76 2.78 –0.02 –0.70%

Shenzhen 3.93 3.96 –0.03 –0.85%

Changsha 2.71 2.74 –0.02 –0.87%

Xiamen 3.26 3.33 –0.08 –2.26%

Haikou 2.46 2.53 –0.06 –2.46%

Zhuhai 3.12 3.23 –0.10 –3.22%

Guangzhou 3.70 3.83 –0.14 –3.54%

Xi’an 2.81 2.91 –0.11 –3.72%

Jinan 2.55 2.65 –0.10 –3.83%

Shenyang 1.97 2.05 –0.08 –3.89%

Chengdu 2.97 3.10 –0.13 –4.11%

Fuzhou 2.75 2.97 –0.22 –7.45%

Sanya 2.56 2.79 –0.23 –8.26%

Nanchang 2.50 2.78 –0.28 –10.11%

Dalian 2.37 2.72 –0.35 –12.83%

Harbin 2.11 2.44 –0.33 –13.64%

Kunming 2.44 2.84 –0.40 –13.99%

Nanning 2.36 2.79 –0.44 –15.64%

Foshan* 2.83 — — —


*First year in survey.

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Poor2

Good4 5

0 1 2 3 4 5

ShenyangHarbinDalian

NanningKunming

NanchangHaikou

ShijiazhuangSanyaJinan

QingdaoFuzhou

ChangshaChengdu

ZhengzhouDongguan

Xi’anChongqing

WuxiNingboFoshanTianjin

HefeiZhuhaiWuhanXiamen


GuangzhouBeijing

ShenzhenShanghai

1 1 2 3 4 5


NanningKunming

NanchangHaikou

ShijiazhuangSanyaJinan

QingdaoFuzhou

ChangshaChengdu

ZhengzhouDongguan

Xi’anChongqing

WuxiNingboFoshanTianjin

HefeiZhuhaiWuhanXiamen


GuangzhouBeijing

ShenzhenShanghai

Exhibit 1-3

City Development Prospects, 2016


Shanghai 4.10

Shenzhen 3.79

Beijing 3.75

Guangzhou 3.67

Suzhou 3.63

Nanjing 3.58

Hangzhou 3.45

Xiamen 3.41

Wuhan 3.41

Zhuhai 3.23

Hefei 3.13

Tianjin 3.10

Foshan 3.09

Ningbo 3.00

Wuxi 2.97

Chongqing 2.94

Xi’an 2.93

Dongguan 2.92

Zhengzhou 2.92

Chengdu 2.89

Changsha 2.81

Fuzhou 2.81

Qingdao 2.76

Jinan 2.62

Sanya 2.52

Shijiazhuang 2.52

Haikou 2.48

Nanchang 2.48

Kunming 2.48

Nanning 2.46

Dalian 2.26

Harbin 2.12

Shenyang 2.06

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Exhibit 1-4

Change in Development Prospects

Ratings Change (2015–2016)

2016 2015 Change Change (%)

Dongguan 2.92 2.42 0.50 20.74%

Shijiazhuang 2.52 2.22 0.29 13.11%

Hangzhou 3.45 3.10 0.35 11.26%

Wuxi 2.97 2.70 0.27 9.98%

Tianjin 3.10 2.83 0.27 9.55%

Suzhou 3.63 3.31 0.31 9.49%

Shanghai 4.10 3.84 0.26 6.80%

Beijing 3.75 3.52 0.23 6.48%

Haikou 2.48 2.37 0.11 4.77%

Ningbo 3.00 2.88 0.12 4.26%

Hefei 3.13 3.03 0.11 3.56%

Xiamen 3.41 3.35 0.06 1.94%

Changsha 2.81 2.76 0.05 1.92%

Nanjing 3.58 3.52 0.06 1.82%

Wuhan 3.41 3.35 0.06 1.79%

Zhengzhou 2.92 2.92 0.00 0.07%

Guangzhou 3.67 3.71 –0.04 –1.14%

Chongqing 2.94 2.98 –0.04 –1.22%

Jinan 2.62 2.68 –0.05 –2.03%

Zhuhai 3.23 3.29 –0.07 –2.03%

Xi’an 2.93 3.00 –0.07 –2.30%

Qingdao 2.76 2.85 –0.09 –3.21%

Chengdu 2.89 3.00 –0.11 –3.70%

Shenyang 2.06 2.15 –0.09 –4.31%

Shenzhen 3.79 3.96 –0.18 -4.46%

Sanya 2.52 2.68 –0.16 –6.03%

Nanchang 2.48 2.66 -0.18 –6.64%

Fuzhou 2.81 3.03 –0.22 –7.29%

Nanning 2.46 2.82 –0.36 –12.82%

Harbin 2.12 2.47 –0.36 –14.43%

Kunming 2.48 2.92 –0.44 –15.16%

Dalian 2.26 2.75 –0.48 –17.57%

Foshan* 3.09 — — —


*First year in survey.

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Shanghai (1)

Shanghai continues to be the most preferred city to invest in for institutional investors. In an interview for this year’s survey, an executive at a global real estate fund manager called Shanghai “the only city in the Chinese mainland with liquidity for foreign investors.” A number of both local and foreign institutional investors interviewed echoed that sentiment, declaring that they would only look at Shanghai and Beijing for investment. Several investors also noted that even if the national economy slows down, Shanghai and other Tier 1 cities would fare relatively better than other cities.

In last year’s survey, the main weak spot for Shanghai was a large volume of office buildings under construction in decentralized locations, especially in the Hongqiao Transportation Hub area. While only a few buildings have been completed, with the vast majority still under construction, the market does not appear to have experienced any meaningful drop in valuation of office buildings. In fact, one investor based in Shanghai complained that office buildings in Hongqiao Transportation Hub have been trading for RMB 30,000 to 40,000 per square meter of gross floor area (GFA), which, in his opinion, is higher than justifiable by achievable rents. However, some noted that daily rent has been adjusted down from around RMB 6 per square meter of GFA to around RMB 5.

A developer noted that the Hongqiao Transportation Hub should perform well in the long run; now, though, it suffers because of inconvenient transportation access from the city center, which has slowed the area’s growth. On the positive side, he pointed to the government plan to build a high-speed railway link between Hongqiao Airport and Pudong Airport.

A couple of interviewees noted a very strong Shanghai office market in the past year, which saw a net take-up of over 1 million square meters of GFA. Another foreign investor expressed a high level of optimism about Shanghai’s office market. He pointed to a substantial shortage of office space when viewed in terms of macro data, such as gross domestic product and population, compared with other advanced countries like the United States and the United Kingdom.

Two other key trends in Shanghai’s real estate market are a substantial increase in home prices and an increase in land prices.

The average sales price for residential units has risen more than 33 percent since June 2015, the second-highest rate in the Chinese mainland after Shenzhen. Anecdotally, some of the highest price hikes were observed in Hongkou District, which lies across the Huangpu River from Lujiazui and north of the Bund. The dwindling supply of new residential units in the city core, coupled with expanded liquidity and strong demand, has pushed up the price in a major residential project from around RMB 40,000 per square meter of GFA a few years ago to over RMB 80,000 per square meter. Long considered less desirable compared with nearby districts or areas such as Jing An and Luwan, Hongkou District is fast undergoing major gentrification. Gentrification is expected to continue in other parts of the city center, with the recent merger of Luwan District into Huangpu District, as well as Zhabei District into Jing’An District.

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The recent record-breaking land prices for plots in relatively remote suburban locations in Xinchang in Pudong and Songjiang in Puxi have brought back the once commonly used phrase “Dough is more expensive than bread.” These two sites were sold in the first half of this year at a land value of over RMB 30,000 per square meter of GFA, comparable to home prices in the neighborhood. With land parcels selling at, near, or above the current market price of completed buildings in the same neighborhood, there is a widely shared concern that residential prices will continue to rise.

In contrast, some interviewees noted that land prices for commercial use have been more stable, with office and retail buildings not as popular with developers due to oversupply.

A Shanghai-based developer noted that with the Shanghai municipal government having announced its intention to keep the city’s permanent population under 25 million (the current population is 24.5 million), less land will be released. He believes that as a result, surrounding cities with a subway, high-speed connectivity, or both will absorb much of the population increase in the Greater Shanghai region.

Shenzhen (2)

There is little doubt that Shenzhen has been the hottest real estate market in the Chinese mainland during the past year. The city’s average new home price increased over 47 percent during the 12 months ended in June 2016, the highest in the Chinese mainland. As noted in last year’s report, the city has a number of positive attributes for housing, such as a dynamic and skilled population base, a relatively low homeownership rate, and improving transportation infrastructure, as well as favorable central government policies, particularly for Qianhai. Many interviewees also cited a limited developable land pool as a key reason for the recent rapid increase of home prices.

Besides these factors, some interviewees noted that the increased availability of funding for homebuyers from real estate agencies and peer-to-peer finance companies has encouraged speculation. A property analyst believes that whereas in the past, 10 percent of homebuyers in the city were buying for investment, that portion has increased to around 35 percent.

An investment consultant noted that the current price hike started in Longhua, a northwestern suburb that has a major station on the high-speed railway line that connects Guangzhou and Shenzhen, and eventually will connect to Hong Kong S.A.R. Home prices increased from around RMB 20,000 per square meter of GFA to over RMB 40,000 in the past year, the consultant said.

Although some interviewees excluded Shenzhen from their list of preferred cities to invest in, favoring instead Shanghai and Beijing, most lauded the city’s strong fundamentals. Several credited the city’s burgeoning IT and private equity sectors as the main drivers of the city’s real estate market. One international investor said that though the city was on a downward path seven to eight years ago, now it is China’s Silicon Valley, with strong job creation.

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Nonetheless, some interviewees expressed concern about the large pipeline of office buildings in the coming years. A research analyst noted that the pace of a new supply of Grade A office buildings for the next two years will be around 2 million square meters of space per year, well above the recent annual net absorption of 500,000 to 700,000 square meters. According to Savills’s data, the city’s Grade A office stock is expected to double from over 5 million square meters at the end of 2015 to over 10 million square meters by the end of 2017, which will result in Shenzhen having a larger Grade A office stock than Shanghai.

Also, a number of both local and foreign investors and developers shared their frustration with not being able to break into the market: the market is seen as very much dominated by local players. Moreover, some believe that home prices are unjustifiably high compared with rents, with one Hong Kong–based investor saying, “Rents are going up, but not fast enough to justify the high asking price.” Likely as a result of diminishing home affordability and the government’s clampdown on third-party financing of the homebuyers’ downpayments, home sales dropped significantly in the second quarter of this year, making Shenzhen one of only two cities in the survey that showed growth in new housing inventory for the 12 months ended in June 2016.

Several interviewees observed that with limited developable land available in the inner city, the city is expanding northward into Longgang District and eastward into Huizhou. Also, urban regeneration will be a key source of new development projects. Two interviewees speculated that in the medium to long term, Shenzhen will be combined with the adjacent cities of Dongguan or Huizhou, or both.

Beijing (3)

Beijing continues to be one of the most preferred markets for institutional investors; however, a number of interviewees complained of limited investment opportunities. One institutional investor noted that Beijing has few tradable assets compared with Shanghai, and another observed that in Beijing, state-owned enterprises and IT companies tend not to be very price-sensitive when it comes to acquiring real estate properties, resulting in fewer opportunities for institutional real estate investors.

As was the case last year, office continues to be the most popular asset category for investment in Beijing. The city’s office rents continue to be the highest in the Chinese mainland, with an average daily rent of RMB 11 per square meter of GFA, which is RMB 2.5 more than in Shanghai and RMB 3.6 more than in Shenzhen. The previous concern about downward pressure on rent due to a large supply of buildings in the Central Business District (CBD) East coming into the market appears to have been misplaced, with the pace of new supply being slower than once predicted and many of the owner/occupiers taking up much of the space, consolidating their various operations formerly in different locations. Still, a number of interviewees struck a more neutral tone. Several investors observed that office rents have stayed stable. The office markets in Zhongguancun and Wangjing continue to be strong, with the IT industry and startups continuing to require an increasing amount of office space.

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In contrast, retail property is seen as not faring well. An investor with a shopping center in Beijing noted that retail tenants have become “very cautious” about store expansion. Retail leasing has been hurt by e-commerce, he explained, and for leasing his team focuses more on lifestyle, food and beverage (F&B), entertainment, and education. A Beijing-based property analyst noted that F&B has been facing a headwind. He explained that several years ago some big operators opened large-scale mass-market F&B outlets in many retail shopping centers, but they have not performed well due to the changing tastes of consumers. The same analyst observed that a large number of department stores have closed in the past year or two. A developer pointed to the central government’s continuing campaign against corruption as a contributing factor for poor performance of retail shopping centers and, in particular, department stores.

As noted in last year’s report, Beijing—reflecting healthy demand for office space and the challenging environment for shopping centers—continues to see conversions of shopping centers or retail podiums of mixed-use projects into office space. Perhaps the two most prominent such conversions are Gaw Capital’s conversion of the 40,000-square-meter GFA retail shopping center portion of the PCCW building in Sanlitun, and SOHO China’s conversion of a property in the CBD, which was originally designed and built as a shopping center, into a coworking space under the brand SOHO 3Q.

The residential market, which experienced a drop in the average sales price in 2014 and the early part of 2015, has made a strong recovery. According to government data, the average sales price of residential units increased over 22 percent for the 12 months ended in June 2016. During the same period, new home inventory dropped to just over eight months, a nearly 50 percent decrease.

According to a Beijing-based developer, rising home prices have resulted from an increase in credit, a relatively limited volume of land sales by the government, and strong demand from both local and nonlocal residents. Beijing has been achieving 60 to 70 percent of the planned land sales volume, with land sold being located in the outskirts, he noted. He also noted that there has been strong demand from people in northeastern China.

Some interviewees noted the growing popularity of immediately adjacent parts of Tianjin and Hebei Province, such as Wuqing and Baoding, for homebuying by Beijing residents due to improving public transportation, including a high-speed railway and subway.

In the medium to long term, the Beijing market is expected to be shaped by several large government initiatives. Foremost among these is the announced move of the Beijing municipal government’s main administration buildings east to Tongzhou, which will transform the district into a major suburb with a sizable cluster of office buildings. Second, the completion in 2022 of the city’s second airport, which is expected to become the world’s largest, will fundamentally reshape the surrounding area in the southern part of Beijing. A Beijing-based investor forecast that residential projects will lead the initial development, followed by commercial property projects. Yet, another Beijing-based developer predicted that a new subway line, the Pinggu Line, between the northern district of Pinggu and downtown Beijing, will make Pinggu District a viable

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area for living for those working in downtown Beijing, with the subway train speed reaching 160 kilometers per hour.

Guangzhou (4)

Like last year, a number of interviewees questioned whether Guangzhou should indeed be considered a Tier 1 city along with Shanghai, Beijing, and Shenzhen. Two interviewees judged the city to be the weakest among the four Tier 1 cities. Many considered Guangzhou as trailing behind its southern neighbor Shenzhen, especially in the IT sector and in attracting entrepreneurs.

Of the four Tier 1 cities, Guangzhou has experienced the slowest rent and price increase in recent years. Also, it has not been an easy place for outside investors and developers to crack into, with the local market being dominated by local developers who are generally considered well financed and capable.

For the office market, the limited presence of multinational company (MNC) tenants and the slow growth of the IT industry, when compared with Shenzhen, were cited as negative factors, as were the local government’s expansion of Pearl River New Town and development of Pazhou on the southern side of the Pearl River as a new office area. According to some interviewees, the local government is planning to promote the e-commerce industry, and Alibaba and Tencent will establish a presence in the expanded area of Pearl River New Town.

Another cause cited for the soft office rental market was the expansion of the office building pool in Nanhai District of the adjacent city of Foshan. With subway connectivity to Guangzhou’s city core, Nanhai has become an alternative for price-sensitive office tenants.

Foshan was also cited as a key reason for the relatively slow increase in Guangzhou’s home prices compared with the other Tier 1 cities. “Foshan takes heat away from Guangzhou for residential and office,” said a developer with a project in Foshan. The same developer observed that for comparable residential units, the market price in Foshan is only RMB 10,000 to RMB 15,000 per square meter of GFA, compared with RMB 40,000 in downtown Guangzhou. Nonetheless, Guangzhou’s housing market should be judged as doing well: the city’s average new home price increased nearly 20 percent during the 12 months ended in June 2016, and the figure for months of new home inventory is below that of six months earlier.

According to a number of interviewees, Guangzhou’s real estate market in the medium to long term will depend heavily on whether and how much the city succeeds in transforming the local economy. In PwC’s recent annual survey on the overall strength of 24 key cities in the Chinese mainland (not including Shanghai and Beijing), Guangzhou ranks at the top, ahead of Shenzhen, due to its strong position in an array of key factors, such as intellectual capital, innovation, urban planning, and transportation.

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Suzhou (5)

Suzhou’s ratings for investment and development prospects improved more than 12 and 9 percent, respectively, from last year, with its rankings for both investment and development prospects moving to fifth place from eighth in last year’s survey.

One property analyst called Suzhou a suburb of Shanghai, highlighting the impact of the high-speed railway and the subway line between the two cities. Kunshan, an area within Suzhou closest to Shanghai, is only 17 minutes by high-speed railway from the Hongqiao Transportation Hub, and downtown Suzhou is only about 22 minutes from the hub. Also, a subway line (Shanghai Metro Line 11) is being extended to Kunshan and eventually to downtown Suzhou.

A developer with a large-scale development project said about 50,000 people in Kunshan commute to Shanghai for work, and a similar number from Shanghai commute to work in Kunshan. With new home prices in inner-city Shanghai exceeding RMB 100,000 per square meter, Kunshan offers a compelling alternative, with home prices well under RMB 20,000 per square meter.

For the traditional urban area of Suzhou, home prices have more than doubled in the past two years, driven by limited land supply, one investor noted. Another noted that one downside of investing in Suzhou is that for commercial properties, there is still limited liquidity from institutional investors.

Nanjing (6)

Nanjing is ranked sixth in both investment and development prospects, one level lower than in last year’s survey. However, the city’s rating for investment improved meaningfully, to 3.56 from 3.39.

A developer with an office building project in the city noted that there is a huge gap between Nanjing and Tier 1 cities in terms of demand for Grade A office space: in Nanjing, there is limited demand from MNCs for such space, he observed. He prefers to invest in residential projects. In contrast, a property analyst noted that compared with other Tier 2 cities, Nanjing’s office market is an overperformer with relatively lower vacancy. Whereas the vacancy rate is high in Hexi New District, office markets in the mature areas such as Xinjiekou are stabilized, he noted.

A local investor pointed out that new home prices have increased around 50 percent since October 2015. He thinks cities such as Nanjing, which had not experienced substantial housing market speculation and had not released too much land in the past, have more room for price growth. Regarding the impact of the high-speed railway, he observed that land parcels around high-speed railway stations trade at a 10 to 20 percent premium compared with similar parcels in other locations without high-speed rail access.

Another residential investor noted that with the central government starting to rein in the overheated market in cities like Nanjing, new home sales volume and prices will be hurt.

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Hangzhou (7)

Hangzhou’s ratings and rankings have improved since last year. The ratings for development and investment prospects rose 10.7 percent and 11.3 percent, respectively—the third-highest increase among the cities in the survey. As a result, its ranking moved up to seventh from tenth for investment and development prospects.

Several investors described Hangzhou as a market driven by investors rather than end users. Said one, “The market is very speculative and has been a harbinger for the real estate market elsewhere in China.” A developer credited the city’s strong housing market recovery to loose credit.

Other interviewees noted their preference for the city based on the city’s strong private sector, including entrepreneurial companies such as Alibaba. One investor noted that it has been challenging to find investment opportunities, with prices being too high.

The housing market is healthy now, with the inventory of new homes at 4.3 months, down 61 percent from a year ago, while the average price for a new home increased 17 percent.

As for the office and retail sectors, Hangzhou’s new central business district, Qianjiang New Town, still has a large number of buildings and retail shopping centers that are either newly opened or under construction. A visit to Yuhang, a northern suburb of Hangzhou, showed a strong residential sales market, boosted by an extension of a subway line to the city center and also a high-speed railway connection to Shanghai and Hangzhou.

Wuhan (8)

Wuhan’s ranking dropped one place in both investment and development prospects to eighth and ninth, respectively, though its ratings for both investment and development prospects showed slight improvement.

Interviewees offered generally positive views about the city, which was described by one as a “magnate” of central China. The strong IT sector, excellent transportation infrastructure (airport, Yangtze River, high-speed railway, and road network), and sound local government policies were cited as positive factors for the city.

Wuhan’s housing market has performed well, with the average new home price increasing 13.8 percent from June 2015 to June 2016 and the new home inventory dropping to a mere three months by this past June. A local developer noted that the Optics Valley area has seen a substantial increase in sales volume, although the price increase has been relatively limited, with many first-time homebuyers working in the area. She also mentioned that given Wuhan’s heated housing market, the government may start imposing policies to cool it down.

As for commercial properties, a number of interviewees cautioned that the city has a large pipeline of office buildings and retail shopping centers, which will put downward pressure on rents. A developer with a mixed-use project that includes office buildings

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in Hankou, the traditional downtown of Wuhan, noted that the strong IT industry has helped bring in more IT-related tenants to Hankou, though most tenants are still from finance and other service sector–related industries.

A number of interviewees praised the local government for encouraging the development of logistics facilities by providing sufficient tracts of land. Given its strategic location, linking south to north and the coastal region to the western region, Wuhan is considered a key logistics hub.

Xiamen (9)

Xiamen has had the second-best-performing housing market behind that of Shenzhen for the past 12 months. New home prices increased 34 percent between June 2015 and June 2016.

According to a developer with a mixed-use project in Xiamen, the city continues to attract a large number of affluent people from other parts of Fujian Province because of the desirability of the city in terms of natural beauty, availability of education and other resources, and livability. Another factor for continuing home price growth is the lack of new land for residential development on the island of Xiamen. The developer noted that in surrounding areas off the island there is generally a limited stock of developable land, with much of the land designated for agriculture.

Regarding a looming increase in office building supply, the same developer said strong demand exists from local Fujian-based companies to relocate to Xiamen. He is optimistic that as long as the economy holds up, the office market should do well. He also believes that the subway line, which is under construction, will be another positive factor by sig-nificantly improving access between the island and the surrounding districts.

Another developer with a mixed-use project on the island said pre-leasing has been going well for her project, which is scheduled to open next year, thanks to strong demand from “affordable luxury” brands. Some of the brands will be opening their first store in Fujian Province.

Zhuhai (10)

With a population of 1.5 million, Zhuhai is the smallest among the cities ranked in the top ten. This southern city bordering Macau is ranked tenth this year in both investment and development prospects.

A Shenzhen-based residential developer called Zhuhai a “fantastic” place to live and attributed the city’s high quality of life to the strong demand for home purchases by outsiders. A number of interviewees think the city’s real estate market would benefit significantly from the scheduled opening of the Hong Kong–Macau–Zhuhai bridge, though one investor expressed some skepticism about the magnitude of the impact. A property consultant pointed to the designation of a free trade zone on Henging Island in the city as another positive factor.

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Chengdu (13)

Chengdu continues to drop in ratings for investment and development prospects—from 3.10 to 2.97 for investment and from 3.00 to 2.89 for development.

The housing market has made a strong recovery, a property analyst based in Chengdu noted. She sees strong demand from homeowners for upgrades from smaller units to larger or higher-quality units. Home prices in the city core have stabilized at around RMB 11,000 per square meter, she said, with a more controlled volume of new supply. In the western suburbs, which have a lot of new supply, prices have not moved much from RMB 5,000 per square meter.

From June 2015 to June 2016, there was a substantial reduction of housing stock, with months of new home inventory dropping by more than half to 5.1 months, but the average new home sales price increased only 3.7 percent from a year ago.

According to the same analyst, the market for commercial mixed-use projects in the city has been “miserable” due to continuing oversupply. Strata office sales have significantly dropped, she said, with buyers turned off by the oversupply and decreasing rent.

Chongqing (14)

Chongqing’s rankings in investment and development prospects are 14th and 16th, respectively, with limited changes to its ratings.

Overall, interviewees were positive about the city’s economic prospects. A developer noted that Chongqing benefits significantly from the urbanization of its large rural population of around 20 million and the expanding manufacturing and high-tech sectors.

The city continues to suffer from a huge over-supply of existing and planned commercial properties. A developer based in the city said

Exhibit 1-5

Number of College Students (thousands)

2006 2014 Increase

Guangzhou 61.9 101.9 40.0

Wuhan 74.7 96.2 21.5

Nanjing 62.1 80.5 18.5

Zhengzhou 44.4 78.3 33.9

Xian 51.4 76.6 25.2

Chengdu 51.4 72.9 21.5

Jinan 54.9 70.0 15.1

Chongqing 37.6 69.2 31.5

Beijing 56.6 60.5 3.9

Nanchang 50.6 55.4 4.9

Changsha 41.8 54.8 12.9

Shanghai 46.6 50.7 4.0

Harbin 38.3 50.6 12.3

Tianjin 35.7 50.6 14.8

Hefei 27.3 49.7 22.4

Hangzhou 35.0 47.5 12.5

Kunming 20.6 41.0 20.4

Taiyuan 26.3 40.1 13.8

Shenyang 31.1 40.0 8.9

Shijiazhuang 29.3 39.4 10.1

Nanning 20.3 35.6 15.3

Fuzhou 21.6 32.1 10.5

Qingdao 26.0 31.3 5.3

Dalian 20.1 28.6 8.5

Haikou 6.1 18.1 11.9

Xiamen 8.0 15.8 7.8

Ningbo 12.1 15.1 3.0

Shenzhen 5.1 8.8 3.6

Source: National Bureau of Statistics.

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that unlike most Tier 2 cities that have just one or two major commercial areas, Chongqing has five, owing to the city’s topography, which includes three rivers flow-ing through the central area. As a result, the city lacks a strong, energetic city center. Discussions are ongoing between some developers and the local government about converting office and retail properties to rental housing, she said, but there have been no successful cases yet.

Overall, interviewees were negative about the city’s commercial property sector. As for the housing sector, it is relatively stable, with an increase of 3 percent in the average sales price of new homes and an 11 percent drop in the inventory of new homes between June 2015 and June 2016.

Tianjin (16)

Tianjin’s ratings for investment and development prospects saw meaningful improve-ments from last year. Also, whereas few to no positive comments about the city were received last year, this year some interviewees provided positive feedback for certain parts of the city.

According to government data, Tianjin’s housing market has improved substantially, with the average new home sales price rising nearly 15 percent and new home inventory dropping to under nine months of supply, a nearly 70 percent decrease since a year ago.

A number of interviewees mentioned Wuqing as an area with good prospects. Located between Beijing’s traditional urban core and Tianjin’s downtown, Wuqing has been quickly developing into a major satellite city of Beijing, aided by a high-speed railway connection to that city and Tianjin. A developer with a project in Wuqing noted that new home prices are now at around RMB 15,000 per square meter, up from about RMB 5,000 when his firm acquired the site for a project several years ago. Since that land acquisition, he added, the land cost has risen to about RMB 7,000 per square meter of GFA from under RMB 2,000. He believes that even at the substantially increased land price, residential development still makes sense because of the huge price gap with Beijing.

In addition to the high-speed railway connectivity, another positive factor is the relocation of many Beijing-based university campuses to Wuqing. The apparently successful operation of the Florentia Village outlet mall next to the Wuqing high-speed railway station is yet another piece of evidence for the growing popularity of Wuqing for Beijing residents.

A developer with a project in Tianjin provided some positive comments about Yujiapu, the Lujiazui-like area of Binhai New District. The recent completion of the Tianjin-Yujiapu high-speed railway line has caused some positive changes, he said, noting that enterprises have started buying office buildings in Yujiapu and people are buying apartments in China-Singapore Eco-City. Nonetheless, the market conditions for Yujiapu remain quite poor. A property analyst noted that some completed buildings have not even been put up for leasing because of limited demand.

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Regarding the traditional Tianjin inner-city area, a number of interviewees expressed negative views. A foreign investor noted that oversupply exists in all asset categories. A property analyst based in Tianjin said that due to completion of a lot of new office and retail buildings since 2014, the office market has a vacancy rate of about 40 percent and a daily rent of RMB 4.5 per square meter. Also, mainly due to oversupply, retail shopping centers are performing poorly, she noted, with the exception of one pedestrian street–themed shopping center located in an affluent part of the downtown. In addition, about five department stores have closed in the past year, she noted.

Foshan (18)

Located west and south of Guangzhou, Foshan is a wealthy city with a population of over 7 million. Created by combining three cities—Nanhai, Shunde, and Chancheng—the city essentially has three core areas. Somewhat like Dongguan, the city is undergoing a transformation from an economy centered on manufacturing of such products as ceramics and furniture to a knowledge-based economy with an emphasis on robotics, home appliances, and industrial design.

Included in the survey for the first time, Foshan is ranked 18th for investment prospects and 13th for development prospects.

According to a property consultant, Foshan’s housing market has been greatly helped by the elimination of home-purchase restrictions. The market had been hit hard by those restrictions, with the average sales price decreasing 30 to 40 percent; the recent price recovery has brought prices back near their previous peak. In areas of Foshan close to Guangzhou such as Nanhai, there has been a substantial amount of homebuying by Guangzhou residents, attracted by a significant price gap of over RMB 20,000 per square meter compared with Guangzhou and the relative ease of commuting via subway.

However, the office sector in Nanhai, which is positioned to provide back-office services for Guangzhou’s financial industry, faces substantial oversupply.

Going forward, with the subway systems of Guangzhou and Foshan becoming integrated, the border between the two cities promises to become increasingly blurred.

Xi’an (19)

Xi’an’s rankings in both investment and development prospects continued to drop. This year the city ranks 19th in investment and 17th in development, down from 15th and 14th last year, respectively.

Xi’an’s average new home price rose only 3 percent, substantially below the median of 8.9 percent for the cities in the survey. The current new inventory of over 18 million square meters of GFA is the third largest among the cities in the survey, trailing only Tianjin and Shenyang.

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A Xi’an-based developer blamed the current challenging market conditions on the local government’s past aggressive land sales and the creation of too many new de-velopment zones. It may take eight or nine years to reduce the stock of commercial properties and about three years for residential properties, she said.

The city’s IT industry has not had a substantial impact on the housing market, the developer said. Employees brought in from outside tend to rent rather than buy, she noted, because their stay may be limited and they receive rent subsidies from their em-ployers. Nonetheless, the highest home prices are located in the high-tech zone, with average sales prices of RMB 15,000 to RMB 18,000 per square meter of GFA, com-pared with the city average of about RMB 7,000.

The office market is oversupplied, the developer noted, with an average sales price of RMB 12,000 to RMB 13,000 for Grade A office buildings. Medium-sized and small firms do not have the purchasing power to buy; they mainly lease.

On the bright side, the developer noted that two subway lines are operational in Xi’an. The impact of the subway has been positive, especially for small office/home office units close to stations.

Dongguan (23)

Dongguan has moved up from near the bottom of the rankings to the low-middle and middle pack of the cities in the survey in terms of investment and development prospects, respectively. In last year’s report, an investment consultant used the expression “clearing the cage and changing the bird” to describe the local government’s effort to upgrade the city’s economic structure.

Interviewees indicate that Dongguan is finally filling the cage with new birds in the form of high-tech companies, especially some based in nearby Shenzhen that are frustrated by the high cost of living for their employees. A few months ago, Huawei, the telecom equipment manufacturer based in Shenzhen, was rumored to be plan-ning to relocate its headquarters from Shenzhen to Dongguan, largely motivated by Shenzhen’s high housing cost. Though the company denied such a plan, the rumor highlighted how Dongguan can be a viable alternative for Shenzhen-based compa-nies. Interviews indicate that Dongguan is benefiting from the spillover from Shen-zhen, especially in areas close to Shenzhen.

A few investors expressed an interest in investing in projects that convert factories to office space.

Shijiazhuang (29)

Though still near the bottom of the rankings for development and investment pros-pects, Shijiazhuang’s ratings for development and investment prospects improved meaningfully. In particular, the rating for development prospects improved from 2.22 to 2.52, a 13 percent increase, the second-highest increase after Dongguan.

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However, a developer with projects in Shijiazhuang was generally lukewarm about the outlook for the city. Regarding the possible positive impact of high-speed railway connectivity to Beijing, he noted that the effect has been limited. It is not feasible to commute between the two cities, he said: it takes 67 to 80 minutes to travel with a ticket costing RMB 128. He thinks the benefits from high-speed railway would be felt if the city were closer to another big city. Despite a huge housing price gap between Beijing and Shijiazhuang, Shijiazhuang is not an alternative for those living and work-ing in Beijing, the developer said.

Another investor listed pollution and limited good job opportunities as other factors for his generally negative view on the city’s prospects. Shijiazhuang is again ranked last in terms of livability in this year’s report.

Dalian (30)

Dalian, a darling among local and foreign developers and investors just five to six years ago, continues its descent and is among the lowest-ranked cities in this year’s survey. Dalian’s ratings for development and investment prospects declined 12.8 per-cent and 17.6 percent, respectively—among the biggest decreases in the survey.

A developer blamed the city’s rampant land sales over five to six years ago, espe-cially in Donggang Economic Zone, for the city’s depressed real estate market. A number of interviewees noted that the newly opened shopping centers are experi-encing high vacancy rates.

In addition to the oversupply of projects, a number of interviewees pointed to a slowdown in trade with South Korea and Japan as companies from these neighbor-ing countries move their operations to Southeast Asia. The exit by South Korean and Japanese companies has hurt the office market. One foreign investor noted that a peer with an office building investment has not been able to exit due to limited inter-est. The IT sector, which was once considered a pillar industry for the city, has been doing “so-so,” that same developer said.

Shenyang (33)

For two years in a row, Shenyang has been ranked at the bottom in both investment and development prospects. None of the interviewees with comments on the city’s real estate market indicated any interest in investing in the city. An institutional inves-tor complained that it is extremely difficult to monetize investments in the city be-cause of negative fundamentals and lack of interest among investors.

The significant oversupply of commercial properties shows no sign of abatement. An experienced real estate brokerage professional, however, said office leasing has been better than expected, with local enterprises taking up space downtown, and a couple of retail shopping centers along Qingnian Dajie have done well in terms of leasing. At the same time, he cautioned that there will be more new supply, which will likely hurt the existing shopping centers.

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A residential developer also noted a continued outflow of young talent to other cities in the south. In an effort to retain young professionals, the city offers new college graduates home purchases with a zero downpayment. The average new home price rose 1.5 percent, among the lowest growth rates for the cities in the survey, but new home inventory remains very high at over 20 months despite a 25 percent decrease from a year ago.

A mixed-use developer speculated that there will be some dead shopping centers in Shenyang, and that his firm may be interested in acquiring such assets at the right time. Opportunities still appear to be some time away, with the local economy growing at the slowest pace among all the cities this year.

Selected Comments for Other Cities

Hefei (12) “Cities like Chongqing, Chengdu, Hefei, and Shijiazhuang are seeing a large

new supply of retail space. In Hefei’s Binhu New Area, a total of 23 retail malls have been planned, and two have opened already.”—local developer

“It only takes cities like Nanjing, Suzhou, and Hefei four to five months to clear their current housing inventory. As such, land cost is on the rise.” —local developer

“Hefei is developing into a transportation hub, and there has been a housing boom.”—local developer with an ongoing project in the city

Zhengzhou (17) “Residential market is quite good. Office sector is okay given the importance

of the city in Henan Province. Retail is not good, as is the case nationwide.” —local investor

“Wholesale has been better than expected, and retail has been excellent so far. For the residential units sold, around 60 percent to 70 percent have already been moved in, which is a high number.”—local developer with an ongoing project in the city

Qingdao (20) “Along with Dalian, Qingdao’s real estate market once experienced a

major speculation. As such, the city’s real estate market has been growing moderately.”—local investor

“Office market in Qingdao has seen balanced supply-and-demand fundamentals.”—property analyst

Changsha (22) “There is too much supply in Changsha.”—local developer “In the past three years, the government did not put up much land for sale.

On average, it sold ten parcels a year.”—local developer with an ongoing project in the city

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Exhibit 1-6

Gross Regional Product (GRP) and the Role of Tertiary Industry

GRP (RMB 100 million)Growth in value added from tertiary industry

Tertiary industry as percentage of GRP

2015 2014 2013Growth

2013–2014Growth

2014–2015 2013–2014 2014–2015 2014 2015

Shanghai 24,965 23,568 21,818 7.0% 6.9% 8.8% 10.6% 64.8% 67.8%

Beijing 22,969 21,331 19,801 7.3% 6.9% 7.5% 8.1% 77.9% 79.7%

Guangzhou 18,100 16,707 15,420 8.6% 8.4% 9.4% 9.5% 65.2% 66.8%

Shenzhen 17,503 16,002 14,500 8.8% 8.9% 9.8% 10.2% 57.4% 58.8%

Tianjin 16,538 15,727 14,442 10.0% 9.3% 10.2% 9.6% 49.6% 52.0%

Chongqing 15,720 14,263 12,783 10.9% 11.0% 10.0% 11.5% 46.8% 47.7%

Suzhou 14,504 13,761 13,016 8.0% 7.5% 9.2% 11.5% 47.2% 49.9%

Wuhan 10,906 10,069 9,051 9.7% 8.8% 9.5% 9.6% 49.0% 51.0%

Chengdu 10,801 10,057 9,109 8.9% 7.9% 8.6% 9.0% 51.6% 52.8%

Hangzhou 10,054 9,206 8,344 8.2% 10.2% 8.5% 14.6% 55.2% 58.2%

Nanjing 9,721 8,821 8,012 10.1% 9.3% 11.5% 11.3% 56.5% 57.3%

Qingdao 9,300 8,692 8,007 8.0% 8.1% 7.9% 9.4% 51.2% 52.8%

Wuxi 8,518 8,502 8,070 8.2% 7.1% 10.3% 9.6% 45.4% 49.1%

Changsha 8,510 7,825 7,153 10.5% 9.9% 9.7% 12.1% 41.8% 43.4%

Ningbo 8,012 7,610 7,129 7.6% 8.0% 7.6% 12.5% 44.1% 47.5%

Foshan 8,004 7,603 7,010 8.6% 8.5% 7.6% 10.3% 36.5% 37.8%

Dalian 7,732 7,656 7,651 5.8% 4.2% 7.0% 8.2% 45.9% 47.8%

Zhengzhou 7,315 6,777 6,202 9.5% 10.1% 8.8% 11.4% 46.4% 48.4%

Shenyang 7,281 7,099 7,159 6.0% 3.5% 3.0% 6.3% 45.5% 47.3%

Dongguan 6,275 5,881 5,490 7.8% 8.0% 6.3% 10.0% 53.8% 53.4%

Jinan 6,100 5,771 5,230 8.8% 8.1% 9.1% 8.9% 55.8% 57.2%

Xian 5,810 5,493 4,884 9.9% 8.2% 9.0% 9.5% 56.1% 58.9%

Harbin 5,751 5,340 5,017 6.9% 7.1% 8.2% 9.3% 54.9% 55.9%

Hefei 5,660 5,158 4,673 10.0% 10.5% 8.5% 11.0% 39.3% 40.6%

Fuzhou 5,618 5,169 4,679 10.1% 9.6% 9.4% 11.3% 46.5% 48.1%

Shijiazhuang 5,441 5,170 4,864 7.9% 7.5% 9.9% 10.6% 43.8% 45.8%

Nanchang 4,000 3,668 3,336 9.8% 9.6% 12.0% 10.7% 40.6% 41.2%

Kunming 3,970 3,713 3,415 8.1% 8.0% 8.1% 8.7% 53.7% 55.3%

Xiamen 3,466 3,274 3,018 9.2% 7.2% 8.7% 6.5% 54.7% 55.8%

Nanning 3,410 3,148 2,804 8.5% 8.6% 8.2% 9.9% 48.5% 49.7%

Zhuhai 2,025 1,867 1,679 10.3% 10.0% 8.7% 10.0% 47.4% 48.0%

Haikou 1,161 1,092 905 9.2% 7.5% 11.3% 8.3% 74.9% 75.7%

Sanya 435 402 366 5.5% 8.1% 3.1% 9.2% 65.0% 65.7%

Sources: National Bureau of Statistics; Municipal Statistics Bureaus.

26

Exhibit 1-7

Net Inflow of Migrants in 2015 (10,000 people)

Residents with household registration

Permanent residents

Net migrants inflow (outflow)

Percentage of migrants to

permanent residents

Shanghai 1,434 2,415 982 41%

Beijing 1,345 2,171 825 38%

Shenzhen 355 1,138 783 69%

Dongguan 195 825 630 76%

Tianjin 1,027 1,547 520 34%

Guangzhou 854 1,350 496 37%

Suzhou 667 1,062 395 37%

Chengdu 1,228 1,466 238 16%

Wuhan 829 1,061 232 22%

Ningbo 587 783 196 25%

Zhengzhou 766 957 191 20%

Hangzhou 724 902 178 20%

Xiamen 211 386 175 45%

Wuxi 481 651 170 26%

Nanjing 653 824 170 21%

Qingdao* 781 910 129 14%

Kunming 556 668 112 17%

Dalian 594 699 105 15%

Shenyang 730 829 99 12%

Jinan* 622 713 92 13%

Fuzhou 678 750 72 10%

Changsha 672 743 71 10%

Haikou* 165 222 57 26%

Xian 816 871 55 6%

Shijiazhuang* 1,025 1,070 45 4%

Sanya 57 75 18 24%

Harbin 961 974 13 1%

Nanchang 520 530 10 2%

Nanning 740 699 (42) (6%)

Chongqing 3,372 3,017 (355) (12%)


*Household registration (hukou) populations of Qingdao, Jinan, Haikou, and Shijiazhuang are as of 2014.

27

Exhibit 1-8

Subway Lines Operating, Under Construction, or Planned (Kilometers)

Operating in 2015 Under construction Planned

Shanghai 588 219 251

Beijing 554 297 394

Guangzhou 235 326 —

Shenzhen 179 193 232

Nanjing 143 79 157

Chongqing 115 141 203

Wuhan 90 — —

Tianjin 87 152 86

Chengdu 86 213 212

Hangzhou 81 144 189

Kunming 59 100 123

Wuxi 56 56 —

Shenyang 54 101 101

Suzhou 52 140 152

Xi’an 51 106 52

Ningbo 49 115 36

Dalian 42 63 26

Nanchang 29 89 86

Foshan 27 39 104

Changsha 27 143 142

Zhengzhou 26 59 97

Harbin 17 75 72

Qingdao 11 237 291

Nanning — 106 126

Dongguan — 96 165

Hefei — 90 170

Xiamen — 72 72

Fuzhou — 60 145

Shijiazhuang — 43 80

Changchun — 42 76

Jinan — 26 81

Lanzhou — 21 35

Sources: China Merchants Securities (Hong Kong); China Association of Metros.

Note: Figures include only underground mass rapid transport lines.

28

Kunshan residential project by Chongbang Group.

29

Exhibit 2-1

Sector Involvement, by Percentage of Respondents


0 20 40 60 80 100

“2012”

“2013”

“2014”

2015”

“2016”

Residential (luxury)

Hotels

Industrial/distribution

Residential (midmarket)

Retail

Office

■ 2016 ■ 2015 ■ 2014 ■ 2013 ■ 2012

Exhibit 2-1 2016Sector Involvement by Percentage of Respondents

87%90%88%88%85%

84%82%84%87%87%

64%61%57%59%51%

63%71% 67%62%63%

71%64%71%68%

55%63%70%63%

Office

Retail



Hotels


CHAPTER 2

Trends in Sector Engagement

C onsistent with previous years of the survey, office and retail continue to be the two sectors with the highest involvement by survey respondents. The midmarket

residential sector saw the largest increase in involvement, rising from 64 percent to 71 percent of respondents, very much in line with the current housing market recovery. The hotel and luxury residential sectors saw the largest decrease in involvement, down 8 percentage points from last year.

In terms of the respondents’ preference for involvement over the next 12 to 24 months, 43 percent indicated that they plan to increase involvement in the midmarket residential sector, up from 28 percent last year. In contrast, the industrial/distribution sector, which

30

Exhibit 2-2

Expected Change in Sector Involvement from 2016 to 2017, by Percentage of Respondents


0 10 20 30 40 50

Not in sector at either time

Involvement will decrease

Involvement will not change

Involvement will increase

■ Not in sector at either time ■ Involvement will decrease

■ Involvement will not change ■ Involvement will increase

Hotels

Retail



Office


Exhibit 2-2 Expected Change in Sector Involvement from 2016 to 2017, by Percentage of Respondents

■ 2016 ■ 2015 ■ 2014 ■ 2013 ■ 2012

43%22%13%22%

40%45%6%9%

36%19%12%34%

34%24%14%28%

33%31%22%14%

17%33%17%33%

last year had the highest percentage of respondents indicating they would increase involvement, 49 percent, this year registered only 34 percent.

It is instructive to examine the range of ratings for each sector for the cities in the survey. The midmarket housing sector has the highest median score at 3.25, while the two sectors with the lowest median scores are office at 2.48 and retail at 2.56—even lower than the median score for the hotel sector, 2.83. The median score for the industrial/distribution sector is the second highest at 3.06, reflecting generally favorable prospects in a fairly large number of cities compared with the retail, office, and hotel sectors. Luxury housing has a median score of 3.05.

Residential(midmarket)

Office

Residential(luxury)


Retail

Hotels

▪ Involvement will increase

▪ Involvement will not change

▪ Involvement will decrease

▪ Not in sector at either time

31

Office There continues to be a consensus that the Shanghai, Beijing, and Shenzhen office markets offer good prospects. Many institutional investors, both local and foreign, stated they would only look for investment opportunities in those cities.

This year, Shanghai has retaken from Shenzhen the number-one ranking for office prospects, with its rating improving to 4.19 from last year’s 4.03. One investor believes that the Shanghai office market is fundamentally undersupplied in the long run, although office assets are fully priced.

Cautious views about Shanghai’s office market were expressed by some interviewees. A Shanghai-based property analyst thinks office rents in Shanghai may drop in the near future due to a large amount of new supply, especially in the Pudong area. A number of interviewees also observed that office rents in the Hongqiao Transportation Hub have dropped from RMB 6 per square meter of GFA to RMB 5 because of a large oversupply. However, one investor predicted that in the long run office rents in the hub area will rise to RMB 10 per square meter, the level currently achieved in Grade A office buildings in the main office areas in the city center.

In Beijing, the release of new supply in the central business district, especially in CBD East, is expected to stabilize rents. However, no one expects rents to drop, given the tendency for new projects to be delayed. A number of interviewees expressed positive views of Zhongguancun and Wangjing, with strong demand for office space from IT companies. The tight office market in the Finance Street area has spawned the development of Lize, located south of that area, as an emerging office cluster.

Shenzhen’s office market greatly benefits from the strong local economy, especially in the IT and finance sectors. Despite an estimated new supply of 2 million square meters of GFA per year for the next few years, which will double the city’s Grade A office stock, none of the interviewees predicts a rent decline. For office rents to stay at the current level or even improve, annual take-up will need to double or triple the recent annual take-up of 500,000 to 700,000 square meters of GFA.

Views about Guangzhou’s office market were generally more subdued. According to a property analyst, the office market in Pearl River New Town tends to attract companies located in older parts of the city that are seeking to upgrade their brand. A developer based in Guangzhou observed that the local government is embarking on a further expansion of Pearl River New Town just as the office market finally appears to have stabilized. He noted that the local government is seeking to foster e-commerce by attracting leading companies in that area, such as Alibaba and Tencent, to acquire sites to build office buildings.

In addition, the large supply of new office buildings in the nearby city of Foshan, especially in Nanhai District, is hurting Guangzhou’s office market. While the average daily rent in Pearl River New Town stands at around RMB 6 per square meter of GFA, it is only around RMB 2 in Nanhai.

32

In contrast with their view of Tier 1 cities, the interviewees in general were negative about Tier 2 office markets. Most Tier 2 cities are suffering from local governments’ aggressive policies to build up commercial properties, motivated by their wish to attract businesses and establish a source of stable revenue in the form of business and real estate taxes levied on those properties.

Further compounding the oversupply situation is that demand is generally limited for Grade A office spaces in Tier 2 and 3 cities. A number of interviewees noted that while

Exhibit 2-3

Sector Prospects: Office



Poor2

Good4 5

ShenyangSanya

HaikouShijiazhuang

HarbinJinan

DongguanNanchang

DalianNanningFoshan

KunmingWuxi

ChangshaNingbo

HefeiTianjin

ZhengzhouZhuhai

ChongqingQingdao

Xi’anFuzhou

ChengduXiamenSuzhouWuhan

HangzhouNanjing

GuangzhouShenzhen

BeijingShanghai

Exhibit 2-3Sector Prospects: Industrial/Distribution

Shanghai 4.19Beijing 3.96Shenzhen 3.92Guangzhou 3.44Nanjing 3.37Hangzhou 3.27Wuhan 3.20Suzhou 3.17Xiamen 2.94Chengdu 2.74Fuzhou 2.67Xi’an 2.59Qingdao 2.58Chongqing 2.57Zhuhai 2.56Zhengzhou 2.50Tianjin 2.48Hefei 2.47Ningbo 2.44Changsha 2.44Wuxi 2.43Kunming 2.38Foshan 2.32Nanning 2.31Dalian 2.30Nanchang 2.29Dongguan 2.25Jinan 2.22Harbin 2.20Shijiazhuang 2.16Haikou 2.13Sanya 2.00Shenyang 1.87

33

0%

5%

10%

15%

20%

25%

Shanghai Beijing Guangzhou Shenzhen

office sectors in some Tier 2 cities received a shot in the arm in 2015 with a significant take-up of space by peer-to-peer finance companies, the collapse of the industry prompted by the closure of Ezubao in early 2016 for fraud has hurt the office rental markets.

Lack of liquidity is a key turn-off for investors to invest in Tier 2 office markets. A local investor complained that her firm has not been able to exit an office investment in Chengdu because of limited interest from investors.

Exhibit 2-4

Office Vacancy Rate in Tier 1 Cities

BeijingShanghai

GuangzhouShenzhen

Source: Savills.

Note: Includes only Grade A office space.

25%

20%

15%

10%

5%

0%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

34

Exhibit 2-5

Monthly Office Rents in Tier 1 Cities

Source: Savills.


100

150

200

250

300

350

0

50

Shenzhen Guangzhou Beijing Shanghai

4Q15

3Q15

2Q15

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

Shanghai

Shenzhen

Beijing

Guangzhou

350

300

250

200

150

100

50

0

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

Exhibit 2-6

Office Development Inventory and Pipeline

▪ 2015 inventory ▪ 2016 development pipeline ▪ 2017 development pipeline

Source: Savills.


MIL

LION

SQU

ARE

MET

ERS

2016 2017

10

8

6

4

2

0

Beijing

Guang

zhou

Sheny

ang

Shang

hai

Cheng

du

Hangzh

ou

Wuhan

Shenzh

en

Chong

qing

Nanjin

gTia

njin

RMB

PER

SQUA

RE M

ETER

OF

GFA

35

Exhibit 2-7

Office Vacancy Rates in Key Tier 2 Cities

0

10

20

30

40

50

60

Nanjing

Wuhan

Hangzhou

Shenyang

Tianjin

Chongqing

Chengdu

4Q15

3Q15

2Q15

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

1Q09

2Q09

Source: Savills.


Wuhan

Chengdu

Chongqing

Hangzhou

Tianjin

Nanjing

Shenyang

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

60%

50%

40%

30%

20%

10%

0%

Exhibit 2-8

Monthly Office Rents in Key Tier 2 Cities

50

100

150

200

4Q15

3Q15

2Q15

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

1Q09

2Q09

170

150

130

110

90

70

50

2-10Of�ce Vacancy Rates in Key Tier 2 Cities (Percentage)

Source: Savills.


Wuhan

Chengdu

Chongqing

Hangzhou

Tianjin Nanjing

Shenyang

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

170

150

130

110

90

70

50

RMB

PER

SQUA

RE M

ETER

36

Exhibit 2-9

Office Investment (RMB 100 million)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2013–14 change

Beijing 196 217 242 171 167 259 364 385 612 713 17%Shanghai 102 124 158 194 188 224 228 263 377 535 42%Hangzhou 26 47 43 54 72 81 119 142 169 253 50%Guangzhou 51 73 63 53 74 82 125 154 167 223 34%Chongqing 17 13 17 12 22 32 53 102 145 177 22%Chengdu 15 12 18 22 31 50 83 126 159 149 –6%

Wuhan 12 12 8 12 19 26 53 126 124 140 14%Zhengzhou 9 14 23 24 22 50 94 105 136 138 2%Fuzhou 5 2 3 3 4 25 53 81 108 137 27%

Jinan 4 5 5 8 14 20 26 55 56 127 126%Tianjin 12 24 35 31 33 77 110 86 100 124 24%Kunming 2 7 5 9 15 18 41 75 96 112 17%Shenzhen 28 31 30 26 35 38 37 27 64 104 62%Ningbo 15 27 31 27 26 51 71 67 96 101 6%Qingdao 14 18 17 21 25 20 29 69 102 98 –4%Xiamen 3 19 15 18 29 17 34 46 70 93 32%Changsha 8 9 7 12 9 7 41 56 64 87 36%Xian 11 15 18 27 23 34 32 37 70 84 20%Shijiazhuang 5 3 1 13 17 23 39 53 84 77 –8%Hefei 8 12 19 31 60 49 37 73 93 73 –22%Dalian 9 13 8 15 14 18 18 30 47 73 54%Nanjing 17 22 19 22 28 27 43 65 60 72 20%Shenyang 15 21 25 46 61 64 51 100 62 72 15%Taiyuan 8 6 3 4 4 7 6 13 27 42 55%Nanning 4 5 5 3 5 7 13 11 17 41 140%Nanchang 3 1 1 2 8 7 16 52 91 37 –59%Harbin 7 5 3 2 4 4 12 22 24 19 –20%Haikou 0 1 2 3 1 6 11 1 5 7 32%Total 605 757 825 867 1,012 1,324 1,839 2,422 3,223 3,908 Annual change 25% 9% 5% 17% 31% 39% 32% 33% 21%


Retail

The retail property sector—along with the hotel sector—is the least popular in this year’s survey. The sector is seen to suffer from several fundamental factors: 1) too much new supply, 2) com-petition from e-commerce, 3) a limited talent pool for operation, and 4) a limited investor pool.

For the retail property sector, oversupply is a much bigger problem than competition from e-commerce, a foreign fund manager stated. Oversupply was also mentioned as a critical factor by many other interviewees. A retail property developer observed that he has seen an oversupply of retail shopping centers in Chongqing, Chengdu, Hefei, and Shijiazhuang. He also

37

cited Hefei’s Binhu New Area and Beijing’s Shunyi District as places with an excessive sup-ply of retail shopping center projects in the pipeline.

While the problem of oversupply is believed to be more severe in the suburbs, a num-ber of interviewees noted that retail malls in mature urban cores are in need of reposi-tioning or even conversion to other uses.

E-commerce continues to affect the merchandise retail component of retail malls, whereas food and beverage and other experience-oriented services, such as enter-tainment and education, have not been affected. A number of interviewees noted an increasing number of department store closures across the country. Department stores in the Chinese mainland essentially lease floor space to retailers and manufacturers. Many interviewees noted that retailers and manufacturers, depending more on e-commerce and more concerned about a slowing economy, have become much more cautious when it comes to store expansion.

An experienced mixed-use developer was more positive about how e-commerce could affect shopping centers. Manufacturers that previously had no physical retail outlets in shopping centers are beginning to set up stores to complement their online sales channel, he explained. In a way, he believes, shopping centers will evolve to become more like de-partment stores while department stores will evolve to become more like shopping centers.

E-commerce’s popularity and the resulting decline in retail business in physical stores have led to significant changes in terms of space use and tenant mix in shopping cen-ters. Now, F&B represents 30 to 50 percent of the space in shopping centers, followed by entertainment and education. Merchandise retail occupies as little as 15 to 20 per-cent of the total space in some shopping centers.

A developer pointed out that the changed mix yields lower rent revenue because F&B, entertainment, and education tenants generally pay lower rents than merchandise retail tenants. Moreover, F&B and entertainment tenants tend to seek more substantial ten-ant improvements from the landlord. Also, a number of interviewees indicated that the market often cannot accommodate an increased number of businesses, such as F&B outlets, which puts further downward pressure on occupancy and rent.

Another key trend is that base rents are becoming a larger portion of total rental reve-nues. According to a mixed-use developer, it is becoming extremely challenging, if not impossible, to track sales by retail tenants because customers can complete transac-tions online using smartphones. As a result, it is becoming less feasible to collect rent based on a percentage of sales.

A foreign investor noted that while retail shopping centers have become increasingly difficult to operate and require sophisticated professionals, there are not enough quali-fied developers or operators. He also expressed skepticism about the ease of turning around poorly performing retail shopping centers.

In addition to these factors, a number of interviewees pointed to limited liquidity as key deterrent for investing in retail shopping centers. Insurance companies, which have become arguably the largest buyer of office buildings, are avoiding the retail

38

property sector. A local fund manager complained that while he sees good investment opportunities in certain pockets of Tier 2 and 3 cities, he simply cannot find investors willing to finance such investments.

Overall, it appears that the retail property sector will be undergoing a long period of major transformation, and the results remain unclear.

Exhibit 2-10

Sector Prospects: Retail


0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

ShenyangHarbin

NanchangHaikou

JinanShijiazhuang

DongguanDalian

NanningWuxi

KunmingHefei

ChangshaSanya

FuzhouFoshan

ZhengzhouNingboTianjin

ChongqingQingdao

Xi’anChengdu

ZhuhaiXiamenWuhanSuzhou

GuangzhouNanjing

HangzhouBeijing

ShanghaiShenzhen

Exhibit 2-11 Sector Prospects: Retail


Poor2

Good4 5

Shenzhen 3.73Shanghai 3.71Beijing 3.46Hangzhou 3.43Nanjing 3.41Guangzhou 3.39Suzhou 3.26Wuhan 3.12Xiamen 2.94Zhuhai 2.88Chengdu 2.79Xi’an 2.78Qingdao 2.70Chongqing 2.63Tianjin 2.59Ningbo 2.58Zhengzhou 2.56Foshan 2.55Fuzhou 2.53Sanya 2.53Changsha 2.53Hefei 2.50Kunming 2.47Wuxi 2.45Nanning 2.41Dalian 2.38Dongguan 2.38Shijiazhuang 2.37Jinan 2.37Haikou 2.31Nanchang 2.29Harbin 2.25Shenyang 1.80

39

Exhibit 2-11

Investment in Retail Property Development (100 million RMB)

2005 2006 2007 2008 2009 2010 2011 2012 2013 20142013–14 change

Chongqing 71 70 75 80 117 134 218 308 377 534 41%

Shanghai 103 155 159 177 185 245 252 294 370 458 24%

Shenyang 64 75 107 175 263 291 273 359 397 399 1%

Beijing 113 226 267 240 201 336 297 276 318 381 20%

Wuhan 21 38 41 31 77 102 167 202 274 358 31%

Chengdu 77 62 54 62 70 100 178 246 299 354 18%

Guangzhou 58 55 68 84 112 179 178 198 206 294 43%

Hangzhou 34 35 46 40 50 69 131 138 175 270 54%

Kunming 11 12 17 21 34 46 75 98 161 240 49%

Fuzhou 17 21 15 16 20 48 86 88 120 222 84%

Tianjin 42 36 64 80 97 127 177 155 165 218 32%

Zhengzhou 26 27 35 36 51 80 86 120 189 215 14%

Xian 34 29 37 54 66 81 83 108 152 209 38%

Hefei 26 25 30 49 71 80 142 142 188 197 5%

Dalian 50 38 36 52 46 94 130 165 252 193 –23%

Changsha 26 23 28 28 33 38 86 124 157 189 21%

Ningbo 33 30 37 34 41 68 96 110 153 184 20%

Shijiazhuang 18 14 9 22 39 82 143 139 152 151 –1%

Nanjing 26 28 31 37 68 80 76 95 121 147 22%

Qingdao 18 23 45 44 72 73 101 140 135 133 –1%

Shenzhen 53 67 53 52 53 59 65 90 84 118 40%

Jinan 10 19 13 34 50 57 56 71 74 112 50%

Harbin 26 27 28 30 34 37 53 122 154 109 –29%

Xiamen 10 11 23 27 19 36 40 53 58 79 38%

Nanning 13 19 15 18 18 26 33 30 39 61 55%

Nanchang 16 11 10 15 21 25 32 39 44 44 0%

Taiyuan 15 10 9 15 14 20 22 41 49 43 –12%

Haikou 7 5 7 6 4 5 8 9 16 33 105%

Total 1,019 1,192 1,361 1,557 1,925 2,621 3,285 3,960 4,879 5,945

Annual change 17% 14% 14% 24% 36% 25% 21% 23% 22%


40

Exhibit 2-12

Retail Development Inventory and Pipeline

10

8

6

4

2

0

▪ 2015 inventory ▪ 2016 development pipeline ▪ 2017 development pipeline

Source: Savills.Note: Includes only prime area retail projects.

MIL

LION

SQU

ARE

MET

ERS

2016 2017

Beijing

Sheny

ang

Tianji

n

Guang

zhou

Wuhan

Shang

hai

Cheng

du

Chong

qing

Shenzh

en

Nanjin

g

Hangzh

ou

Exhibit 2-13

Change in Same-Store Sales, 2007 to 2015

Source: Company reports.

Spring Land

Parkson

Maoye

Intime

Golden Eagle

–10

–5

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014 2015

Maoye

Golden Eagle

Parkson

IntimeSpring Land

30%

25%

20%

15%

10%

5%

0%

–5%

–10%

41

Residential

Midmarket housing is the most popular sector in this year’s survey, followed by luxury hous-ing. Paradoxically, the housing market has been greatly helped by a slowdown of the econ-omy. In the past couple of years, the central government has significantly watered down or ended such policies as home-purchase restrictions and high downpayment requirements that were enacted a few years ago to slow home price growth. As a result, home sales volume increased in most cities, and the average selling price increased significantly in all Tier 1 cities and many Tier 2 and 3 cities. Thanks to a huge increase in new home sales, the new home inventory level has dropped to just several months in most Tier 1 cities and to substantially less than 12 months for many Tier 2 cities.

Consistent with last year, Tier 1 cities continue to be ranked at or near the top. For mid-market housing, Tier 2 cities in the Yangtze River Delta, such as Hangzhou, Suzhou, and Xiamen, saw the largest increases in ratings.

Interviews and visits to a number of so-called satellite cities of Shanghai and Beijing indicate that a substantial portion of new homes purchased in the satellite cities of Kunshan in Suzhou and Wuqing in Tianjin are bought by residents of Shanghai and Beijing, respectively. These satellite cities are each about 20 minutes by high-speed train from the larger cities. With home-purchase restrictions still in effect in Tier 1 cities and average selling prices in those cities out of reach for the majority of the city residents, new home prices in these satellite cities are a bargain at around RMB 15,000 per square meter of GFA.

A Beijing-based developer noted that new homes in Tianjin Binhai New Area are now selling at double last year’s prices, largely as a result of the opening of the high-speed railway line that connects the area to downtown Tianjin and Beijing.

Satellite cities of Tier 1 cities that benefit from the spill-over effect include Tianjin, Baoding, Langfang, and Wuqing, near Beijing; Suzhou, Kunshan, and Wuxi, near Shanghai; and Dongguan and Foshan, near Shenzhen and Guangzhou, respectively. In the case of Foshan, where the home-purchase restriction was terminated in 2015, a local developer noted that Hong Kong residents have been buying up homes; in Foshan, homes sell for around RMB 15,000 per square meter of GFA, a fraction of the home price in Hong Kong.

Easy credit has been a key factor in the current housing sector recovery. A number of interviewees noted that some homebuyers put up as little as 10 percent of the purchase price as the downpayment, with a peer-to-peer finance company or a real estate broker-age house providing financing to make up the rest of the legally required downpayment. In particular, Shenzhen, Shanghai, and Nanjing were mentioned as cities where this type of financing was quite prevalent until the central government disallowed it early this year.

The heated residential market has led to a rising number of land transactions, espe-cially in Tier 1 cities, at record-breaking prices. A number of interviewees complained that the margin for developers has been squeezed too much by the rising land costs. Given exorbitant prices for land sold in public auctions, a number of developers and

42

Exhibit 2-14

Sector Prospects: Midmarket Housing



Poor2

Good4 5

HarbinShenyang

DalianNanchang

NanningDongguan

KunmingShijiazhuang

Xi’anHaikou

ChongqingSanya

ChangshaZhengzhou

QingdaoJinanWuxi

FuzhouHefei

TianjinNingboFoshanZhuhai

ChengduWuhanSuzhou

HangzhouGuangzhou

NanjingBeijingXiamen

ShenzhenShanghai

Exhibit 2-17Sector Prospects: midmarket housing

Shanghai 4.29Shenzhen 4.26Xiamen 4.00Beijing 3.98Nanjing 3.96Guangzhou 3.92Hangzhou 3.91Suzhou 3.87Wuhan 3.75Chengdu 3.48Zhuhai 3.47Foshan 3.43Ningbo 3.42Tianjin 3.41Hefei 3.35Fuzhou 3.29Wuxi 3.25Jinan 3.24Qingdao 3.22Zhengzhou 3.19Changsha 3.13Sanya 3.13Chongqing 3.09Haikou 3.06Xi’an 3.06Shijiazhuang 3.00Kunming 3.00Dongguan 2.93Nanning 2.93Nanchang 2.85Dalian 2.81Shenyang 2.36Harbin 2.36

investors indicated their preference for building land banks by acquiring existing proj-ects from other companies.

With respect to luxury housing, a Hong Kong–based investor expressed her concern about the government’s tendency to intervene when prices are perceived to be in-creasing too rapidly. Nonetheless, she said, for long-term and patient investors who can wait out negative government policies, luxury housing investments in Tier 1 cities may provide healthy returns.

43

Exhibit 2-15

Sector Prospects: Luxury Housing



Poor2

Good4 5


ShijiazhuangDongguan

NanningHaikou

Xi’anNanchang

JinanChangshaChengdu

ChongqingWuxi

TianjinKunming

FoshanZhengzhou

FuzhouNingbo

QingdaoSanyaHefei

ZhuhaiSuzhouWuhan

NanjingXiamen

GuangzhouHangzhou

BeijingShenzhenShanghai

Exhibit 2-18Sector Prospects: luxury housing

Shanghai 4.05Shenzhen 4.00Beijing 3.88Hangzhou 3.85Guangzhou 3.78Xiamen 3.69Nanjing 3.65Wuhan 3.50Suzhou 3.48Zhuhai 3.21Hefei 3.19Sanya 3.13Qingdao 3.12Ningbo 3.12Fuzhou 3.08Zhengzhou 3.07Foshan 3.05Kunming 3.00Tianjin 2.96Wuxi 2.89Chongqing 2.81Chengdu 2.80Changsha 2.79Jinan 2.75Nanchang 2.75Xi’an 2.73Haikou 2.73Nanning 2.69Dongguan 2.64Shijiazhuang 2.61Dalian 2.60Harbin 2.54Shenyang 2.16

44

Exhibit 2-16

Primary Commodity Residential Inventory, May 2016

Total inventory1 Months of inventory2

City 1,000 sq m

% change,

May 2015–May 2016 Months

% change,

May 2015–May 2016

Tier 1

Beijing 8,520 –17% 8.1 –49%

Guangzhou 8,460 –12% 5.9 –39%

Shenzhen3 5,940 24% 16.0 83%

Shanghai 4,440 –50% 3.1 –59%

Tier 2

Shenyang 26,320 –6% 20.6 –25%

Tianjin 22,270 –22% 9.0 –69%

Xi’an 18,520 –18% 13.4 –35%

Qingdao 16,590 –14% 9.2 –56%

Chengdu 13,300 –36% 5.2 –51%

Chongqing 12,340 –11% 6.3 –5%

Dalian 11,490 –18% 18.4 –42%

Changsha 11,260 –27% 7.9 –32%

Foshan 10,820 –6% 6.0 –35%

Wuhan 9,330 –35% 3.0 –68%

Hangzhou 8,840 –24% 4.3 –61%

Jinan 8,710 –2% 5.3 –48%

Kunming 6,980 –11% 12.1 2%

Nanning 6,590 11% 7.9 –24%

Wuxi 6,400 –38% 5.1 –73%

Dongguan 5,030 –32% 7.2 –25%

Zhengzhou 4,840 –23% 3.5 –60%

Ningbo 4,480 –19% 6.5 –49%

Suzhou 3,870 –50% 3.7 –62%

Haikou 3,740 –22% 9.8 –44%

Nanchang 3,540 3% 5.4 –48%

Nanjing 2,990 –55% 1.6 –81%

Fuzhou 2,510 –16% 8.9 –31%

Xiamen 2,420 –21% 5.2 –56%

Hefei 1,920 –62% 2.3 –64%

Source: China Real Estate Information Corp.1 For-sale units completed but unsold, as well as units under construction but allowed for presale.2 Total inventory divided by average three-month sales volume. 3 Shenzhen inventory includes serviced apartments for strata title sale.

45

Exhibit 2-17

Primary Commodity Residential Price Index, June 2016

Comparisons

Month over month

(May 2016=100)

Year over year

(June 2015=100)

Compared with 2015

(year 2015=100)

Compared with 2010

(year 2010=100)

Shenzhen 102.6 147.4 143.2 215.5

Xiamen 104.7 134.0 132.4 171.4

Shanghai 102.4 133.7 131.9 167.7

Nanjing 104.0 131.5 129.6 151.2

Hefei 104.9 129.1 128.6 143.6

Beijing 102.3 122.3 121.4 155.8

Guangzhou 101.8 119.4 118.6 150.6

Hangzhou 101.6 117.4 116.7 109.2

Tianjin 102.3 114.6 114.2 126.4

Fuzhou 101.2 113.9 113.3 127.3

Wuhan 102.0 113.8 113.0 128.3

Wuxi 102.6 109.7 109.8 111.5

Nanchang 101.2 109.6 109.0 122.5

Zhengzhou 101.6 109.4 108.7 132.2

Ningbo 100.6 108.9 108.4 103.5

Nanning 100.6 106.3 106.2 114.3

Shijiazhuang 101.1 105.8 105.4 123.5

Jinan 100.8 105.8 105.7 114.5

Changsha 100.5 104.9 104.7 118.2

Qingdao 100.5 104.1 103.8 104.7

Chengdong 100.6 103.7 103.1 111.0

Chongqing 100.0 103.4 103.0 110.0

Xian 100.5 103.0 102.3 114.3

Haikou 100.2 102.6 102.1 99.4

Harbin 100.5 101.7 101.6 110.9

Shenyang 100.2 101.5 101.5 112.0

Dalian 100.3 100.5 100.8 109.9

Sanya 99.8 100.5 100.2 101.2

Kunming 100.0 100.1 100.4 108.9

Median 101.1 108.9 108.4 114.5

Sources: National Bureau of Statistics; ULI.

46

Industrial/Distribution

The industrial/distribution sector’s popularity among investors continued to decline in this year’s survey, although some interviewees expressed positive views for the sector in the long run.

A logistics developer noted that a lot of money has been invested in the sector, and it has been hard for the sector to digest it all. He pointed to the difficulty of obtaining land

Exhibit 2-18

Sector Prospects: Industrial/Distribution


0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

SanyaShenyang

HaikouHarbin

NanchangKunming

JinanNanning

ShijiazhuangQingdao

ZhuhaiDalian

FuzhouZhengzhouChangsha

FoshanXiamen

DongguanWuxiHefeiXi’an

NingboNanjing

ChongqingChengdu

HangzhouTianjinBeijing

GuangzhouWuhanSuzhou

ShanghaiShenzhen

Exhibit 2-21Sector Prospects: Industrial/Distribution


Poor2

Good4 5

Shenzhen 3.96Shanghai 3.80Suzhou 3.78Wuhan 3.67Guangzhou 3.64Beijing 3.55Tianjin 3.54Hangzhou 3.47Chengdu 3.43Chongqing 3.38Nanjing 3.33Ningbo 3.22Xi’an 3.12Hefei 3.12Wuxi 3.10Dongguan 3.07Xiamen 3.06Foshan 3.06Changsha 3.00Zhengzhou 2.94Fuzhou 2.93Dalian 2.70Zhuhai 2.69Qingdao 2.68Shijiazhuang 2.63Nanning 2.53Jinan 2.53Kunming 2.50Nanchang 2.36Harbin 2.27Haikou 2.20Shenyang 2.19Sanya 2.13

47

not only in Tier 1 cities, but also in certain Tier 2 cities where the local government is reluctant to sell land for logistics use because, compared with other uses, it does not generate substantial tax revenues or create jobs.

An investor noted that in Tier 1 cities land costs tend to be well above 30 percent of total costs, which is the industry norm. For that reason, old substandard facilities continue to fill the gap in supply in those cities.

While e-commerce has been seen as a key growth driver for the sector, a developer noted that e-commerce players tend to pay low rents and are quite price sensitive. As such, the sector has seen limited to no rental growth for the past several years.

In Tier 2 cities, there is excess supply, a local investor observed. Another recent trend is that e-commerce companies such as Alibaba are acquiring land and developing logistics facilities on their own. They have been able to acquire land relatively cheaply from local governments. An investor predicted, however, that e-commerce players will not dominate the logistics property market and instead will focus on their core business. He also said an undersupply of logistics facilities exists everywhere in the Chinese mainland.

Hotel

The hotel sector continues to be the least popular sector because of an oversupply of five-star hotels in most cities. For some Tier 2 cities, that oversupply may worsen in the coming years. For example, according to a hotel consultant, Changsha, the provincial capital of Hunan, has about 3,000 rooms and another 8,800 rooms in the pipeline. An investor with hotel assets also said an oversupply of hotels exists in general.

A number of interviewees mentioned recent conversions of hotels for office use in Beijing, Shanghai, and Guangzhou. However, such conversions are believed to be quite challenging in terms of design and construction. The conversion of the JC Mandarin Hotel on Nanjing West Road in Shanghai, noted as being in progress in the 2014 survey report, is still ongoing. Though several conversions of hotels to other uses have been completed in Tier 1 cities, these conversions cannot make a real dent in the hotel oversupply.

A clear divide exists between winners and losers among cities, the hotel consultant said. Shanghai is the clear winner, he said, with Shenzhen and Beijing falling not far behind. Shanghai is the strongest market in terms of average daily rate. Five-star hotels in Shanghai reached an average room rate of RMB 1,000, and for international-branded five-star hotels, room rates reached RMB 1,600 on average. Compared with Beijing, Shanghai receives a disproportionately large number of overseas business travelers whose budgets allow them to stay in leading international five-star hotels, he said. The recent completion of Shanghai Disneyland is also seen as a positive development for Shanghai’s hotel sector.

48

Exhibit 2-19

Sector Prospects: Hotels



Poor2

Good4 5

Exhibit 2-14Sector Prospects: hotels

DongguanShijiazhuang

ShenyangHarbin

NanningJinan

ZhengzhouFoshan

NanchangHefei

TianjinFuzhou

ChongqingChangsha

DalianNingbo

WuxiHaikou

KunmingZhuhai

QingdaoChengdu

XiamenXi’an

WuhanSuzhou

GuangzhouSanya

NanjingBeijing

HangzhouShanghaiShenzhenShenzhen 3.64

Shanghai 3.59Hangzhou 3.33Beijing 3.32Nanjing 3.29Sanya 3.29Guangzhou 3.25Suzhou 3.24Wuhan 3.15Xi’an 3.07Xiamen 3.06Chengdu 3.05Qingdao 2.94Zhuhai 2.86Kunming 2.86Haikou 2.86Wuxi 2.83Ningbo 2.81Dalian 2.72Changsha 2.71Chongqing 2.70Fuzhou 2.69Tianjin 2.65Hefei 2.60Nanchang 2.58Foshan 2.50Zhengzhou 2.50Jinan 2.47Nanning 2.46Harbin 2.31Shenyang 2.30Shijiazhuang 2.24Dongguan 2.14

49

Exhibit 2-20

Domestic Tourism

Source: National Bureau of Statistics, China National Tourism Administration

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

—

30%

25%

20%

15%

10%

5%

0%

10,0

00 P

EOPL

E

YEAR

LY G

ROW

TH

▪ Domestic travelers ▪ Yearly growth

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Exhibit 2-21

Foreign Tourism

▪ Inbound travelers from Hong Kong, Macau, and Taiwan

▪ Inbound foreign travelers (excluding Hong Kong, Macau, and Taiwan)

▪ Outbound travelers

Yearly change, inbound travelers

Yearly change, outbound travelers

Sources: National Bureau of Statistics; China National Tourism Administration.

160

145

120

100

80

60

40

20

0

NUM

BER

OF T

OURI

STS

IN M

ILLI

ONS

25%

20%

15%

10%

5%

0

–5%

YEAR

LY C

HANG

E

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

50

Hangzhou Qianjiang.

51

Undoubtedly, the sharp recovery of the residential market in the past year is due to the central government’s expansionary monetary policy and the termination

of home-purchase restrictions in Tier 2 and 3 cities. In the near term, the central government’s monetary policy and policies related to home purchases will continue to largely determine the market conditions, especially for the housing market.

CHAPTER 3

Issues Affecting Development and Investment

Exhibit 3-1

Impact of Various Issues on Development and Investment over the Next 12 MonthsExhibit 3-1 Impact of Various Issues on Development and Investment over the Next 12 Months

332 54 5Moderately

negative impactLittle/noImpact

Moderatelypositive impact

Substantiallypositive impact

Substantiallynegative impact

11


Impact on Development

Local/central government environmental policies 2.89

Local government residential development and sales practices 2.85

Impact of e-commerce on demand for real estate 2.85

Central government public/low-income housing policies 2.82

Outlook for the domestic economy 2.80

Central government land release policies 2.74

Local government land release practices 2.71

Central government real estate tax policies 2.56

Continued imposition of home-purchase restrictions 2.38

Cost/difficulty of raising external financing 2.27

Impact on Investment

Central government land release policies 3.01

Impact of e-commerce on demand for real estate 2.96

Central government public/low-income housing policies 2.95

Local government residential development and sales practices 2.95

Local/central government environmental policies 2.90

Local government land release practices 2.86

Outlook for the domestic economy 2.77

Continued imposition of home-purchase restrictions 2.64

Central government real estate tax policies 2.59

Cost/difficulty of raising external financing 2.52

52

At the same time, interviewees pointed to a few positive factors such as 1) improving transportation infrastructure, primarily the high-speed railway and subway; 2) greater willingness by the central and local governments to allow more flexible use of land, which could go a long way toward resolving the oversupply of commercial properties in most Tier 2 and 3 cities; and 3) the new two child policy, which is expected to create more upgrade demand for housing as families expand.

Policies on Home-Purchase Restrictions and Mortgage Lending

A number of interviewees mentioned that the overheated housing market will cause the central government to release increasingly stringent regulations to prevent further over-heating. According to a Shenzhen-based residential developer, the required minimum downpayment for second-home purchases in Shenzhen increased to 60 percent early this year, and that has caused homes sales to slow substantially.

The same developer thinks the central government is more experienced and sophisti-cated than it has been in the past in regards to housing matters. He sees an approach that is differentiated according to each city’s situation. For example, the government will continue its more lax policies for cities, such as Dalian, Shenyang, Kunming, and Xi’an, where housing inventory is still high. In contrast, the central government is al-ready acting to rein in the heated housing market in cities like Xiamen and Nanjing, where the minimum downpayment requirement has been raised to 30 percent for first-time homebuyers from the previous 20 percent.

A number of interviewees noted that aggressive lending by real estate agencies and peer-to-peer finance companies to finance a part of the buyer’s downpayment—especially in Shenzhen, Shanghai, and Nanjing—contributed to the overheating of the housing markets in those cities. Such financing was prohibited by the central government earlier this year.

Transportation Infrastructure: High-Speed Railway and Subway

Though not among the issues covered in the survey questionnaire that affect the industry, transportation infrastructure has become a critical factor affecting local real estate markets, according to the survey results and interviews. As noted in previous surveys, high-speed railway has significantly reduced travel time and is making possible daily work commutes between cities as far as 60 to 150 kilometers apart. The expanding high-speed railway network, especially in the three main economic clusters of Beijing-Tianjin, the Yangtze River Delta, and the Pearl River Delta, has enabled nearby Tier 2 or 3 cities to become viable alternatives for people unable to afford a home in Tier 1 cities, where prices seemingly are spiraling out of control.

Like high-speed railways, expanded subway systems are also reshaping Tier 1 and 2 cities. A number of interviewees noted that home prices increasingly reflect access to subway lines and less the proximity to the traditional city center. Perhaps the emergence of well-planned suburban or satellite cities, with easily accessible public

53

transportation and good job opportunities, could have a tempering impact on the high home prices in city centers. With Tier 1 cities running out of developable land and wanting to slow population growth, nearby cities with high-speed-railway and subway connectivity are well positioned for fast growth. The significant improvement in ratings for the cities near Tier 1 cities in this year’s survey corroborates this trend.

Within cities, subway systems are becoming influential factors. A developer in Shenzhen observed that the start of operation of subway lines in Longgang has significantly increased home prices in the area. In Shanghai, some of the highest home price increases are being observed in places like Songjiang District, long considered an exurb of Shanghai. With a subway line directly connecting the Songjiang District to Puxi, the Shanghai city center, the commute is now considerably less than one hour, making the area a convenient place for workers, especially young professionals, commuting to the center.

Zoning Policies

In light of the significant oversupply of commercial properties in most cities, there has been growing recognition by policy makers of the need to provide more flexibility in zoning. Historically, local governments preferred development of commercial proper-ties under the notion that they would help attract businesses and provide a source of

Exhibit 3-2

High-Speed Railway

2008 2009 2010 2011 2012 2013 2014 2015 2020E

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

25%

20%

15%

10%

5%

0%

KILO

MET

ERS

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2020E

Kilometers

▪ Total operating high-speed rail ▪ All operating rail ▪ Percentage of all rail that is high-speed rail

Source: National Railway Administration of the People’s Republic of China.

54

sustainable tax revenues in the form of business and real estate taxes. A number of developers pointed to the central government’s announcement early this year that it would encourage more flexibility in converting commercial spaces to rental housing. A number of interviewees noted that while active negotiations are taking place between developers and local governments, no successful instance of such a conversion has yet been observed. A developer noted that the real impact will be felt if and when the government allows commercial land to be converted to residential land, which will then allow the developer to sell residential units.

Meaningful progress in allowing developers to change space allocation to reduce of-fice and retail space in development projects should go a long way to address the se-vere oversupply of office and retail space, especially in Tier 2 and 3 cities.

Urban Planning Policies

The State Council’s “Guidelines for Strengthening Urban Planning and Development,” announced in early February 2016, promotes more open communities (without fences), public engagement, and intensifying land use, among other policies. While local city governments still need to revise their regulations to reflect these guidelines, a develop-er noted that the plan for her firm’s project in a Tier 2 city, originally planned as a gated community, was revised for the development to have no fences and be accessible to the public. A Shanghai-based developer noted that Shanghai now caps the size of land parcels for sale at two to four hectares for residential use and one to two hectares for commercial use. If a site exceeds the maximum allowed size, the developer needs to provide additional streets in the project accessible to the public 24 hours a day.

Land Release Policies

Local governments’ past aggressive land sales are blamed for the relatively underper-forming and oversupplied markets such as are found in Shenyang, Dalian, Kunming, Xi’an, Changsha, and Wuxi. In contrast, a shortage of developable land is often cited as a key reason for large price increases in Tier 1 cities. A number of interviewees noted that cities with an oversupply have started reducing new land sales volumes.

For Tier 1 cities, conversion of industrial land for residential use could offer a solution to the problem of limited land. A developer noted that starting two to three years ago, Shenzhen has allowed up to 30 percent of Type 3 industrial land—which allows for business park–type use—to be developed for residential use. He thinks this practice will eventually be adopted by Shanghai and other cities.

A number of interviewees mentioned that the substantial increase in prices for land parcels sold by the government in open auction has led developers to turn to acquiring other companies or development projects from other companies.

55

Exhibit 3-4

Land Sales by Tier of City, First Half of 2015

Site area put up for sale (10,000 sq m)

Site area sold (10,000 sq m)

Land sales revenue (RMB 100 million)

Accommodation value

(RMB per sq m) Premium

Tier 1 cities Absolute value 1,034 938 1,768 8,829 17%

Year-over-year –34% –38% –32% 9% –16 pctg pts

Tier 2 cities Absolute value 16,658 13,480 3,639 1,393 10%

Year-over-year –34% –39% –37% 2% 1 pctg pt

Tier 3 cities Absolute value 29,680 18,944 2,428 722 5%

Year-over-year –25% –40% –43% –2% –2 pctg pts

Source: China Index Academy.

Exhibit 3-3

Land Sales by Tier of City, First Half of 2016




Accommodation value


Tier 1 cities Absolute value 881 663 1,526 11,009 61%

Year-over-year –15% –29% –14% 25% 44 pctg pts


Year-over-year 8% 5% 78% 76% 39 pctg pts


Year-over-year –5% 2% 5% 6% 11 pctg pts


Exhibit 3-5

Land Sales by Tier of City, 2015




Accommodation value



Year-over-year –23% –25% 1% 19% 2 pctg pts






56

Exhibit 3-6

Land Purchased by Developers (10,000 sq m)

2005 2006 2007 2008 2009 2010 2011 2012 2013

2014

Total

2005–2009

Total

2010–2014

% change,

2005–09 to 2010–14

Total 2005–2014

2015 permanent residents

Land supply

per capita (sq m)

Shenyang 1,141 1,071 1,929 1,550 476 1,072 756 810 860 305 6,166 3,803 –38% 9,970 829 12.02

Changsha 716 939 706 1,001 393 288 440 311 459 280 3,755 1,778 –53% 5,533 743 7.45

Kunming 228 364 434 691 538 326 446 453 782 324 2,254 2,331 3% 4,585 668 6.87

Hefei 392 414 488 266 324 656 471 476 659 632 1,885 2,895 54% 4,780 779 6.14

Dalian 313 477 355 202 427 600 611 510 336 343 1,775 2,400 35% 4,175 699 5.97

Chongqing 1,385 1,468 1,738 1,164 1,228 1,355 1,665 2,183 1,897 1,865 6,983 8,964 28% 15,947 3,017 5.29

Qingdao 407 748 440 367 302 619 666 240 433 292 2,264 2,251 –1% 4,514 910 4.96

Zhengzhou 415 310 249 469 437 1,436 217 350 462 399 1,880 2,863 52% 4,743 957 4.96

Haikou 131 333 98 179 73 54 38 35 14 114 813 255 –69% 1,068 222 4.81

Xiamen 107 168 119 157 210 310 139 189 125 58 761 821 8% 1,583 386 4.10

Hangzhou 471 518 538 383 371 418 375 112 228 128 2,281 1,261 –45% 3,542 902 3.93

Wuhan 773 450 503 326 229 235 398 457 503 227 2,281 1,820 –20% 4,100 1,061 3.87

Fuzhou 275 359 211 106 296 328 366 214 390 212 1,248 1,511 21% 2,759 750 3.68

Nanchang 382 197 99 100 153 164 209 129 257 255 932 1,014 9% 1,947 530 3.67

Tianjin 730 905 920 513 445 652 757 300 211 123 3,513 2,042 –42% 5,556 1,547 3.59

Harbin 342 284 318 348 377 389 769 335 265 128 1,669 1,886 13% 3,555 974 3.65

Chengdu 1,115 1,284 549 340 216 250 255 153 272 365 3,503 1,295 –63% 4,799 1,466 3.27

Taiyuan 109 52 140 248 182 194 151 88 181 66 731 679 –7% 1,410 432 3.27

Jinan 392 111 218 234 128 211 192 273 218 274 1,082 1,167 8% 2,249 713 3.15

Xian 283 137 218 311 215 395 267 169 335 336 1,164 1,502 29% 2,665 871 3.06

Nanning 188 252 352 288 149 190 192 101 80 246 1,229 809 –34% 2,038 699 2.92

Beijing 774 295 392 823 625 859 507 306 906 581 2,909 3,159 9% 6,068 2,171 2.80

Nanjing 377 188 519 296 285 192 33 121 121 71 1,665 538 -68% 2,203 824 2.67

Ningbo 207 263 179 168 196 287 220 57 240 232 1,013 1,036 2% 2,049 783 2.62

Shijiazhuang 104 104 178 305 250 707 443 274 83 75 941 1,582 68% 2,523 1,070 2.36

Guangzhou 309 462 281 186 577 188 339 143 182 319 1,815 1,170 –36% 2,986 1,350 2.21

Shanghai 754 525 141 326 185 432 636 301 422 313 1,932 2,104 9% 4,036 2,415 1.67

Shenzhen 124 92 34 59 30 14 39 97 135 106 339 391 15% 730 1,138 0.64


57

Exhibit 3-6

Land Purchased by Developers (10,000 sq m)

2005 2006 2007 2008 2009 2010 2011 2012 2013

2014

Total

2005–2009

Total

2010–2014

% change,

2005–09 to 2010–14

Total 2005–2014

2015 permanent residents

Land supply

per capita (sq m)

Shenyang 1,141 1,071 1,929 1,550 476 1,072 756 810 860 305 6,166 3,803 –38% 9,970 829 12.02

Changsha 716 939 706 1,001 393 288 440 311 459 280 3,755 1,778 –53% 5,533 743 7.45

Kunming 228 364 434 691 538 326 446 453 782 324 2,254 2,331 3% 4,585 668 6.87

Hefei 392 414 488 266 324 656 471 476 659 632 1,885 2,895 54% 4,780 779 6.14

Dalian 313 477 355 202 427 600 611 510 336 343 1,775 2,400 35% 4,175 699 5.97

Chongqing 1,385 1,468 1,738 1,164 1,228 1,355 1,665 2,183 1,897 1,865 6,983 8,964 28% 15,947 3,017 5.29

Qingdao 407 748 440 367 302 619 666 240 433 292 2,264 2,251 –1% 4,514 910 4.96

Zhengzhou 415 310 249 469 437 1,436 217 350 462 399 1,880 2,863 52% 4,743 957 4.96

Haikou 131 333 98 179 73 54 38 35 14 114 813 255 –69% 1,068 222 4.81

Xiamen 107 168 119 157 210 310 139 189 125 58 761 821 8% 1,583 386 4.10

Hangzhou 471 518 538 383 371 418 375 112 228 128 2,281 1,261 –45% 3,542 902 3.93

Wuhan 773 450 503 326 229 235 398 457 503 227 2,281 1,820 –20% 4,100 1,061 3.87

Fuzhou 275 359 211 106 296 328 366 214 390 212 1,248 1,511 21% 2,759 750 3.68

Nanchang 382 197 99 100 153 164 209 129 257 255 932 1,014 9% 1,947 530 3.67

Tianjin 730 905 920 513 445 652 757 300 211 123 3,513 2,042 –42% 5,556 1,547 3.59

Harbin 342 284 318 348 377 389 769 335 265 128 1,669 1,886 13% 3,555 974 3.65

Chengdu 1,115 1,284 549 340 216 250 255 153 272 365 3,503 1,295 –63% 4,799 1,466 3.27

Taiyuan 109 52 140 248 182 194 151 88 181 66 731 679 –7% 1,410 432 3.27

Jinan 392 111 218 234 128 211 192 273 218 274 1,082 1,167 8% 2,249 713 3.15

Xian 283 137 218 311 215 395 267 169 335 336 1,164 1,502 29% 2,665 871 3.06

Nanning 188 252 352 288 149 190 192 101 80 246 1,229 809 –34% 2,038 699 2.92

Beijing 774 295 392 823 625 859 507 306 906 581 2,909 3,159 9% 6,068 2,171 2.80

Nanjing 377 188 519 296 285 192 33 121 121 71 1,665 538 -68% 2,203 824 2.67

Ningbo 207 263 179 168 196 287 220 57 240 232 1,013 1,036 2% 2,049 783 2.62

Shijiazhuang 104 104 178 305 250 707 443 274 83 75 941 1,582 68% 2,523 1,070 2.36

Guangzhou 309 462 281 186 577 188 339 143 182 319 1,815 1,170 –36% 2,986 1,350 2.21

Shanghai 754 525 141 326 185 432 636 301 422 313 1,932 2,104 9% 4,036 2,415 1.67

Shenzhen 124 92 34 59 30 14 39 97 135 106 339 391 15% 730 1,138 0.64


58

Two Child Policy

Another potentially long-term positive factor is the central government’s adoption at the beginning of this year of the so-called two child policy in place of the one child policy. While the policy should not have a big impact in the real estate market in the near term, a high birthrate should provide a big boost to the economy in the long run, provided couples take advantage of the new policy. A developer in Guangzhou noted that hos-pital child-delivery beds are fully booked until next year due to an increase in pregnan-cies and births. He expects more demand for larger homes. Some public commenta-tors, however, worry that with rising housing and education costs and work demands, birthrates may not increase substantially.

Outlook for the Domestic Economy

In last year’s survey, an investor said, “The combination of a slow economy and the government’s easing policies make a favorable environment to invest in real estate.” He added, “The market is bottoming out. Sales volume is growing. Sales price will fol-low.” He was right.

This year, a number of interviewees noted that GDP will increase 6.5 percent or per-haps even less—a rate that is still good compared with growth in most countries. “The old economy, like steel and mining, is slowing, but the new economy, the service sec-tor, is growing,” said one foreign investor. “A growth of 4 percent to 5 percent is still excellent. The biggest risks are very much under control.” In contrast, another foreign investor noted, “For foreign investors, the biggest concern is the domestic economy. There is a lot of negative sentiment about China.” For both local and foreign investors, Tier 1 cities, especially Shanghai and Beijing, are seen as safe havens.

Cost and Difficulty of Raising External Financing

An expansionary monetary policy by the central government has made it easier for developers to get funding. A developer noted that real estate funds have much more liquidity than in the past, and developers have also been tapping the public bond market and doing more co-investment deals with third parties with excess liquidity. In an indirect way, the expansionary monetary policy has funneled money to peer-to-peer finance companies and real estate agencies that have fanned the housing market.

A foreign investor noted that as a result of considerable liquidity in the market, foreign investors are not as competitive and are seeing fewer opportunities to work with local developers—the direct opposite of the situation in 2014 and early 2015.

E-Commerce’s Impact

As noted in the retail portion of chapter 2, many interviewees view e-commerce as having a detrimental impact on retail shopping centers. A developer said that as con-sumers increase their online purchases, top fashion retailers that once required about 2,000 square meters of space now require just over 1,000 square meters, and smaller

59

retailers are also reducing their space requirements. A number of interviewees men-tioned a growing number of department store closings in various cities.

Even the logistics sector, which was once seen to be profiting from the growth of e-commerce, is now seen to suffer from flat to limited rent growth from major e-commerce company tenants.

Central Government’s Real Estate Tax Policies

In last year’s survey report, three tax issues were noted that could have significant impact on real estate investment or development. They were 1) Announcement 7, which essentially levies a 10 percent capital gains tax on share transfers of an offshore company when the underlying asset is located in the Chinese mainland; 2) the pending announcement and implementation of a value-added tax (VAT) on real estate sales; and 3) Circular 62, which prohibits tax rebates and other incentive policies by local governments.

Exhibit 3-7

E-Tail Sales in China, 2011 to 2018

2011 2012 2013 2014 2015 2016E 2017E 2018E

▪ E-tail sales ▪ Total retail sales Year-over-year e-tail growth E-tail sales as percentage of total retail sales

45

40

35

30

25

20

15

10

5

0

80%

70%

60%

50%

40%

30%

20%

10%

0%

RMB

TRIL

LION

Exhibit 3-4 E-Tail Sales in China, 2011 to 2018

Source: iResearch; National Bureau of Statistics.

60

According to an experienced tax accountant, Announcement 7 is being strictly enforced. Now, for sales contracts for the sale of offshore companies with assets in the Chinese mainland, it is common practice to include a provision that requires the seller to provide the buyer proof of having paid the relevant taxes to the local jurisdiction.

With respect to the VAT, the final rules were announced this past March and went into effect May 1. The new rule replaces the business tax, which was based on 5.5 per-cent of revenues, with one that levies an 11 percent tax on revenues, with qualified costs deducted. While the new rule is meant to be revenue neutral, developers and investors may have either greater or less tax liabilities as a result. For example, land costs can be deducted, but developers will need to provide proof of payment from the local government, and getting a receipt from the municipal government would mean full deduction whereas one from a district government would mean only a 50 percent deduction. Though there is a grandfathering option for buildings completed before May 1 of this year, it is unknown how long the grandfathering will last.

Last, the accountant noted that Circular 62 is not being as rigorously enforced. There is general recognition that promises of tax rebates and other incentives specified in written agreements need to be respected.

61

Inside a high-speed train.

62

CHAPTER 4

What’s New? And What Is Livable?

In this year’s survey, e-commerce distribution continues to be the highest-rated niche sector, but its rating dropped from 4.17 to 3.98, in line with comments by

some interviewees that the sector faces limited investment opportunities and limited rent growth. Niche sectors that experienced meaningful improvement in ratings were serviced apartments, up from 3.08 to 3.28, and resorts, up from 3.00 to 3.21.

Sectors that experienced a meaningful decline in ratings were overseas homebuilding, down from 3.63 to 3.30; self-storage, down from 3.47 to 3.23; and public/low-income housing, down from 3.18 to 2.98. The big drop in ranking and rating for overseas homebuilding generally reflects mixed results so far by Chinese developers in their overseas projects and a less favorable macro environment. Ranked second in last year’s survey, the sector is now ranked in the bottom half.

Perhaps the niche sector that has been getting the most attention in the past year is coworking space, which ranked fourth with a rating of 3.44; the sector was added to the survey this year.


Exhibit 4-1

Investment Prospects for Niche Sectors


Poor2

Good4 5

E-commerce distribution centers 3.98

High-tech/cyber/knowledge parks 3.67

Senior housing/retirement homes 3.45

Coworking office space 3.44

“Youth” apartments 3.36

Business parks 3.36

Overseas homebuilding 3.30

Serviced apartments 3.28

Self-storage 3.23

Resorts 3.21

Other 3.00

Public/low-income housing 2.98

63

E-Commerce Distribution Centers

This niche sector essentially overlaps with the industrial/distribution sector covered in chapter 2. One key trend is that e-commerce fulfillment centers are being set up near city centers to ensure prompt delivery. Another trend is that e-commerce companies like Alibaba and Yihaodian are building their own distribution centers that compete with logistics property developers (see page 46).

High-Tech Parks and Business Parks

A number of interviewees expressed a strong preference for investing in high-tech parks in Shanghai and Beijing. Zhongguancun and Wangjing in Beijing and Zhangjiang and Caohejing in Shanghai have developed into major destinations for investment by institutional investors. Clearly, these areas greatly benefited from the explosive growth of China’s IT sector. However, for some interviewees, prices are already so high that expected returns on investment are not very attractive.

Compared with high-tech parks in Tier 1 cities, those in Tier 2 and 3 cities have mixed results. In particular, Shenyang and Dalian were mentioned as having significantly underperforming high-tech parks. One investor noted that private developers of high-tech parks often compete for tenants with local governments or government-owned companies that offer incentives to attract tenants for their own projects.

Business parks that are not tech focused are generally found in so-called creative or innovation parks. Often they are located in old factory sites, with old buildings having been converted to office and other commercial uses. The best examples are found in Beijing’s 798 Art District and in or near the city center of Shanghai, supported by the local government’s policy of preserving historic buildings and the old fabric of the city.

A number of interviewees expressed an interest in investing in such conversion projects in Tier 1 cities, especially in Shanghai and Beijing, and one investor said he sees opportunities in particular to convert factory buildings in Dongguan.

Housing for Seniors and Retirement Housing

In last year’s report, a consensus was found among interviewees that while there appears to be a lot of potential in China’s senior housing sector due to the country’s aging population, generally the sector suffers from limited real demand, a limited pool of qualified operators, and the absence of a proven business model.

In this year’s survey, many interviewees offered comments similar to those from last year, but interest in the sector seems to have increased. A foreign investor said her firm has started looking at the sector more carefully, but she thinks the returns are still below her company’s requirements. Another investor said “senior living is very attractive to us,” but he admitted that he has not yet seen a business model that works in terms of profitability.

64

A local developer whose firm operates and develops senior housing projects in Beijing and Hebei said the firm is doing land development that eventually will lead to development of senior housing in cities near Beijing that have a high-speed railway connection to Beijing. He said that whereas a sufficient pool of people in Beijing can afford the combination of an upfront lump-sum payment and a monthly fee of RMB 6,000 to RMB 10,000, there is not enough consumption power in low-tiered cities. He also said land bank available for senior housing is limited and that it takes ten to 20 years to recover the investment costs.

One industry consultant offered a much more optimistic view. “The sector has changed dramatically in the past 18 months,” he said. “Players are distancing themselves from the lifestyle senior housing model, and most people are now focusing on the medical care model.”

Foreign senior care facility operators that have been in the market for the past several years are now ramping up their investment, the consultant said, and new ones have recently entered the market. In his opinion, the high-water-mark cost to fill up nursing homes in Shanghai is RMB 12,000 to RMB 13,000 per bed per month. While he agreed that the yield is still low and does not excite local developers and investors with double-digit returns for their investments, the sector is promising because retirees will have increasing consumption power.

He also pointed to the huge shortage of senior nursing facilities. In the Chinese mainland, there are 44,000 senior facilities with an average size of 250 beds, he said, and in six to seven years the number of required facilities should reach 160,000, implying a need for around 116,000 new facilities, or 29 million additional beds.

The consultant thinks insurance companies will become the most important type of investors for the sector, given the long-term nature of their funds. This past July, Taikang Life Insurance opened a senior care facility in Sheshan in Songjiang District of Shanghai. The facility is designed to have 2,200 rooms and can accommodate as many as 3,000 residents. In addition to the Shanghai facility and another in Beijing that opened in June 2015, the company intends over the next three years to open new facilities in other cities, including Guangzhou, Sanya, Suzhou, Chengdu, Wuhan, and Hangzhou.

Coworking Space

Coworking space has rapidly expanded in the past year, with SOHO China’s 3Q and former China Vanke executive Mao Daqing’s UR Work considered the leaders in this fast-emerging niche sector. As of July 31—only 18 months after the business began operations—SOHO China’s 3Q had 16 locations in Shanghai and Beijing with about 13,600 seats. The company announced its plan to enter certain Tier 2 markets, where it will lease space from other parties. In the case of UR Work, since being founded in April 2015, it has completed five rounds of fundraising and already is valued at about RMB 5.5 billion.

Among the interviewees, views diverged on the long-term potential and viability of the coworking-space business. Some interviewees lauded the model as innovative,

65

satisfying unmet needs of not only startups, but also established businesses. To them, the business model is very much in step with the changing work styles and provides more than just a space to work. In contrast, some interviewees regarded the coworking model as another form of serviced office businesses and found the current valuations of coworking businesses to be unjustified.

An operator of a serviced office business in Guangzhou commented that coworking space and serviced office business models are merging. He pointed to the currently low rents in coworking spaces in Guangzhou and predicted that many coworking businesses will not survive without government subsidies.

A foreign investor struck a more optimistic note, saying, “Coworking space will be a long-term phenomenon. Even large companies are leasing space in coworking spaces for their sales team or for training, etc.” He noted that established large companies are increasingly experiencing fast changes in human resource requirements and thus prefer to have flexibility in expanding or reducing space and avoid making long-term commitments.

In contrast, another investor said there has been too much hype about what is essentially a serviced office business. He capped the market size of coworking space at the size of the serviced office market. Also, he found current valuations to be excessive.

A number of interviewees believe that convenient location is critical, as well as attracting the right mix of tenants.

A local investor predicted that shopping centers will increasingly be converted to coworking spaces. In fact, SOHO China recently did just that with one of its properties in Beijing CBD.

Serviced Apartments

Last year’s report noted the negative impact of a drop in demand for serviced apartments, a sector that traditionally has catered to senior executives of MNCs. That drop was largely caused by a decrease in the number of foreign expatriate executives and in rent subsidies.

According to a property analyst whose firm also manages serviced apartments, the serviced apartment markets in Beijing and Shanghai have been performing well, thanks to the closings of a number of such apartments. Local investors have been primarily purchasing serviced apartment buildings and strata-selling them, he noted, achieving significantly higher sales prices than possible in en-bloc sales. In Shanghai, about 800 individual serviced apartment units have been taken off the market in the past year for eventual strata-sale, he said. As a result, the occupancy rate has increased to 91 percent, about 4 percentage points higher than a year ago. According to the analyst, the pool of serviced apartment units is being replenished with new supply that is primarily in city outskirts, such as Jinqiao and Waigaqiao of Pudong, while the apartments exiting the market tend to be in the city center.

66

In Tier 2 cities, demand is growing for low-cost rental housing options from local executives, the analyst said.

Resorts

The biggest trend for the resort sector during the past year has been theme park openings. In June, Shanghai Disneyland Park opened for business with big fanfare as part of Shanghai Disney Resort. Located in Pudong District near the Pudong International Airport, the theme park has significantly increased land and property values for the surrounding areas.

Dalian Wanda, the largest commercial property developer, also entered the theme park market this June with the opening of its first theme park in Nanchang, the provincial capital of Jiangxi. Another large-scale theme park project that opened recently was Changlong Park on Hengqing Island in Zhuhai, which opened in March 2014. Also, Evergrande, a major home developer based in Guangzhou, is developing a theme park on a reclaimed island east of Haiko, Hainan Island.

A developer observed that it is difficult for theme parks to generate enough profits on their own. Instead, developers of theme parks need to generate profits in other ways, such as developing residential projects in the vicinity. Dalian Wanda’s project in Nanchang includes over 2 million square meters of GFA for sale, primarily villas. The developer also pointed out that for locally operated theme parks, providing attractive content—when compared with Disneyland—will be a key challenge.

An investor noted that while he dislikes the hotel sector in general in the Chinese mainland because of oversupply, he thinks hotels around Shanghai Disneyland would be a good investment. A property analyst also noted that hotels in Shanghai will need to adopt more family-oriented services to attract family vacationers visiting Disneyland.

Overseas Homebuilding

There is a growing realization among Chinese mainland developers of the challenges of doing development projects in overseas markets.

Some interviewees mentioned projects in Australia and the United States, where Chinese developers have run into trouble getting the necessary permits to start construction. Some interviewees also mentioned the growing difficulty in obtaining government approval to move capital out of the country because the government wants to stabilize the currency exchange rate. An investor who worked on overseas investments predicted that more developers will be amenable to partnering with ex-perienced developers in overseas markets, as China Vanke and Ping An each have done with Tishman Speyer and Hines.

Another cause for the tapering of interest in overseas homebuilding may be that the U.S. market is perceived to be fully or nearly fully priced and no longer offers suffi-cient returns. Another investor observed that foreign countries are now less welcom-ing to Chinese developers.

67

In the long run, Chinese investors and, in particular, insurance companies are ex-pected to continue to increase investment in overseas markets in line with a growing amount of available funds.

Other Niche Sectors: Youth Apartments, Self-Storage, and Public/Low-Income Housing

In this year’s survey, limited feedback was received on youth apartments, self-storage facilities, and public/low-income housing because they are fairly new in the Chinese mainland.

One investor commented that while he sees the need for youth apartments—rental apartments catering to young professionals—it is not yet an asset that exists in a form that can be invested in. Regarding self-storage, though anecdotal evidence shows some self-storage facilities in Shanghai, they remain quite limited in scale. As for public/low-income housing, this sector continues to be driven by the public sec-tor; none of the interviewees participates in this sector.

Looking forward, the potential may exist for rental housing for the mass market, spurred by government policies. The central government has announced a policy to allow conversion of commercial space to rental housing. This year in Shanghai, land parcels have been sold by the government with a certain portion designated for rental housing.

Exhibit 4-2

Overseas Real Estate Investment

$0

$5

$10

$15

$20

$25

$30

$35

Exhibit X5 Overseas Real Estate Investment

2009 2010 2011 2012 2013 2014 2015

Source: Knight Frank.

US$

BILL

ION

2009 2010 2011 2012 2013 2014 2015

$35

$30

$25

$20

$15

$10

$ 5

$0

68

What Is Livable?

The livability rankings in this year’s survey generally mirror those from last year. Key findings are:


Poor2

Good4 5


Exhibit 4-3

Livability

Shanghai 4.15

Suzhou 3.98

Hangzhou 3.98

Shenzhen 3.89

Xiamen 3.87

Zhuhai 3.76

Chengdu 3.74

Qingdao 3.68

Nanjing 3.66

Sanya 3.62

Guangzhou 3.60

Ningbo 3.57

Kunming 3.44

Wuxi 3.41

Dalian 3.34

Chongqing 3.21

Haikou 3.18

Fuzhou 3.08

Foshan 3.03

Wuhan 3.03

Nanning 3.00

Hefei 2.73

Xi’an 2.72

Changsha 2.68

Tianjin 2.67

Dongguan 2.63

Beijing 2.63

Jinan 2.56

Nanchang 2.53

Harbin 2.50

Zhengzhou 2.42

Shenyang 2.03

Shijiazhuang 1.90

69

▪ Shanghai is ranked at the top, moving up from second place.

▪ Shenzhen moved to fourth from ninth place.

▪ Cities in the Yangtze River Delta generally improved their ratings and are all ranked in the upper half of the cities.

▪ Dalian’s ranking dropped the most, from seventh to 15th this year, while Shenyang is ranked second from the bottom, its rating falling to 2.03 from 2.46.

▪ Beijing’s rating improved slightly to 2.63 from 2.51, but the city still ranks near the bottom.

The drop in ratings and rankings for Dalian and Shenyang reflect the poor economic conditions in the northeastern part of the country, known as China’s rust belt. These two cities had the lowest economic growth rates in 2015 among the cities in the survey.

Exhibit 4-4

Air Quality Comprehensive Index, June 2016

Rank among 74 cities City Index Major pollutants

1 Zhuhai 1.83 O3

3 Haikou 1.95 O3

4 Xiamen 2.04 NO2

5 Shenzhen 2.21 NO2

9 Nanning 2.52 O3

11 Kunming 2.70 O3

12 Fuzhou 2.82 O3

16 Dongguan 3.13 O3

17 Foshan 3.16 O3

19 Ningbo 3.25 O3

20 Harbin 3.26 NO2

21 Nanchang 3.29 O3

22 Guangzhou 3.33 O3

29 Qingdao 3.74 O3

32 Changsha 3.82 O3

35 Dalian 3.93 O3

38 Wuhan 4.11 O3

41 Hangzhou 4.20 O3

44 Shanghai 4.29 PM2.5

47 Hefei 4.43 PM2.5

48 Chongqing 4.47 PM2.5

49 Suzhou 4.48 O3

50 Nanjing 4.51 O3

53 Shenyang 4.56 O3

54 Wuxi 4.57 O3

58 Xian 4.72 O3

59 Chengdu 5.11 PM2.5

62 Shijiazhuang 5.30 PM2.5

64 Tianjin 5.42 PM2.5

64 Beijing 5.42 PM2.5

69 Zhengzhou 5.87 PM10

71 Jinan 5.95 PM2.5

Source: China National Environmental Monitoring Center (CNEMC).

Note: The CNEMC releases a monthly air quality comprehensive index for 74 cities in China. The index takes into consideration six key pollutants, namely SO2, NO2, PM10, PM2.5, CO, and O3. The higher the index, the worse the air quality.

70

Guangzhou Tianhebei.

71

Inside SOHO 3Q, a coworking space in Beijing CBD.

72

APPENDIX

Tax Collection Reform

Alan Wu and Michael MaPwC China

In the past year, the tax policy for the real estate industry in China has changed, including, but not limited to, tax regulation for indirect transfer of properties in

China, comprehensive expansion of the business tax to value-added tax reform, and an update on local preferential policies clearance.

Indirect Transfer of Properties in China

Since the State Administration of Taxation (SAT) released the “Announcement concerning Several Matters relating to Corporate Income Tax (CIT) on Indirect Transfers of Properties by Non-Tax Resident Enterprises (non-TRE)” (Announce-ment [2015] No. 7) in 2015, the CIT treatment on indirect transfer of properties by non-TREs has remains unchanged. The state level has not issued any amendment/revision regarding this topic.

However, it has been noticed that although the macro environment remains un-changed, the supervision/discretion of tax authorities differs at the local level. From a practical perspective, there was an individual income tax (IIT) evasion case handled by a local taxation bureau (LTB) in which an overseas individual has been using a foreign shell company to indirectly transfer the assets (mainly an office building) in China to another foreign company. However, most of the current regula-tions regarding indirect transfer (No. 698, Announcement 7, and others.) are clearly targeted to companies rather than individuals.

In addition, at the end of 2015, a provincial High People’s Court accepted a case involving a second instance of a non-TRE suing a state tax bureau (STB) under its jurisdiction. The STB determined that the non-TRE had no reasonable commercial purpose for the indirect transfer of a company in China (which had the major as-set of rights to road operations), and thus imposed the CIT on the relevant equity transfer income. The complainant was unwilling to accept that treatment, and in-stituted a legal proceeding in the city-level Intermediate People’s Court. After los-ing the case, the complainant appealed to the provincial High People’s Court. The High People’s Court found that the overseas company being transferred to another group/company did not involve any operation activity other than the investment in the domestic company and that the transfer price mainly depended on the valu-ation of the domestic company. Thus the facts were clear that the related equity transfer income was actually from China. In this regard, the High People’s Court rejected the appeal, sustaining the original judgment.

These cases indicate that the current practice of some local tax authorities is quite harsh and may become stricter. If the indirect transfer of assets in China takes place, the group/company should pay extra attention to relevant CIT/IIT issues.

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Comprehensive Expansion of Business Tax to Value-Added Tax Reform

On January 1, 2012, the State Council launched the pilot program in stages for the transformation from business tax (BT) to value-added tax (VAT) in China—known as B2V reform—in order to improve the input VAT credit mechanism, to mitigate multiple taxation issues, and to promote industrial upgrades. By the end of 2015, the B2V reform had been completed for the industries of transportation, certain modern services, postal services, telecommunications, and others.

On March 5, 2016, at the fourth session of the 12th National People’s Congress, Premier Li Keqiang indicated in the government work report that beginning May 1 the B2V reform would be expanded to cover the remaining four industries. On March 18, the Executive Meeting of State Council officially approved the implementation measures for the B2V reform. Six days later, the Ministry of Finance and the State Administration of Taxation (SAT) jointly released Caishui [2016] No. 36 (Circular 36) on the “Comprehensive Roll-out of the B2V Transformation Pilot Program,” and the long-awaited expansion measures of the B2V reform were officially released.

Circular 36 stipulates that the taxable scope of the B2V reform is “the sales of services, intangibles, or immovable properties within China.” The applicable VAT rates for different industries are:

The rate is 11 percent for transportation services, postal services, basic telecommunication services, construction services, immovable property leasing services, sales of immovable properties, and transfer of land use rights.

The rate is 17 percent for leasing of tangible movable properties.

The rate is 6 percent for other taxable activities (including financial services and consumer services, etc.).

Certain qualified cross-border taxable activities provided by domestic companies or individuals will be zero-rated or exempted from the VAT.

Major special rules apply to real estate and construction industries, including a simplified filing method, a land cost net basis deduction, and provisional taxes.

Simplified Filing Method

According to Circular 36, companies in the real estate and construction industries can choose to adopt a simplified filing method if certain conditions are met (see table).

If a company chooses to adopt the simplified filing method, considering that the VAT levy rate would be the same as the previous BT rate while the taxable basis for VAT would be lower than that for BT (i.e., tax exclusive versus tax inclusive), the overall indirect tax burden would be slightly reduced and the profit would be slightly increased.

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Simplified Filing Method

Business Transactions Available VAT method Taxable sales amount Levy rate

Construction

industry

General VAT taxpayers

providing construction

services to old

construction projects1

Contract without

supplying materials

Contract with the

principal providing

equipment and material

Simplified

Total sales

considerations

and additional

fees received—

subcontracting fee3%

Sale of

immovable

properties

Real estate

development

enterprises selling

self-developed

old projects2

Simplified

Total sales

consideration and

additional fees received 5%


selling non-self-

developed immovable

property acquired

before expansion date

Simplified

Total sales

consideration

and additional

fees received—

acquisition cost

5%


selling self-developed

immovable property

acquired before

expansion date

Simplified

Total sales

consideration

and additional

fees received

5%

1 According to Circular 36, “old construction projects” refers to: • A project with the construction commencement date that is on or before April 30, 2016, and is written in the construction permit;

• If the construction permit has not been received, a project with a construction commencement date that is on or before April 30, 2016, and is written in the construction contract.

According to the further rules in Announcement [2016] No. 17, a project that has a construction permit without a construction commencement date but has a construction commencement date that is on or before April 30, 2016, and is written in the construction contract could also be treated as an old construction project under Circular 36 and could choose to adopt the simplified filing method.

2 According to Circular 36, “old real estate projects” refers to projects with a construction commencement date that is on or before April 30, 2016, and is written in the construction permit. According to the further rules in the Announcement [2016] No. 18, “old real estate projects” refers to: • A project with the construction commencement date that is on or before April 30, 2016, and is written in the construction permit; • If there is no construction commencement date in the construction permit or the construction permit has not been received, a project with a

construction commencement date that is on or before April 30, 2016, and is written in the construction contract.

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However, for real estate companies, under the simplified filing method the input VAT could not be creditable, and the land price could not be deducted when calculating the VAT. In this regard, for projects at the early stages of construction and with high land/construction costs, the simplified filing method may not be the best choice. Companies should consider the detailed situation of each project and perform relevant calculations and analysis before making a final choice.

For construction companies, the choice for the old projects may be affected by the real estate companies (if the real estate company chooses the simplified filing method, generally it would require the construction company to choose the simplified filing method as well) besides the input VAT credit itself. As for the new projects, the construction companies would have the right to choose the simplified filing method only when the relevant contracts do not involve supplying materials or are with a principal providing equipment and materials. In this regard, the construction companies should leverage the pros and cons of supplying equipment and materials before making a final choice.

For leasing of immovable properties, Circular Caishui [2016] No. 68 indicates that when a general VAT taxpayer in the real estate development industry leases the self-developed old real estate project, it may choose to adopt the simplified filing method and calculate the tax payable at a levy rate of 5 percent. Circular 68 does not provide a definition of a “self-developed old real estate project.” In this regard, the definition may refer to that under Circular 36 and Announcement 18 (see table).

Nevertheless, there may still be problems in the actual practice—for example, whether and under what conditions subleasing companies can choose to adopt the simplified filing method. Practically, some STBs at the local level believe the condition should be the date of the contract concluded between the sublessor and the final lessee, while others believe that the date the contract was concluded between the landlord and the sublessor would be more appropriate. The companies should discuss these uncertainties with the tax authorities responsible and confirm their position.

Note that once the general taxpayer adopts the simplified filing method, no change can be made within 36 months.

In the meantime, there are no current regulations regarding how long the simplified filing method will apply for the real estate and construction industries. Does this mean that the simplified filing method would be valid forever? The answer may not be yes. This could be a challenge for the companies in deciding whether to choose the simplified filing method. Companies should pay continuous attention to this topic.

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Land Cost Net Basis Deduction

According to Circular 36, for the general VAT taxpayers in the real estate development industry who sell real estate projects they developed (excluding the old real estate projects for which the simplified filing method is adopted), the sales amount is the balance of the total sales consideration and additional fees received after deduction of the land price paid to the government departments at the time of acceptance of the transferred land. SAT Announcement [2016] No. 18 further specifies that the deduction of the land price will be subject to the finance voucher supervised (and printed) by the finance authorities at the provincial level or above.

According to the spirit of these regulations, the deductible land price would only be the land transfer charge, and the company should obtain the finance voucher supervised (and printed) by the finance authorities at the provincial level or above for the purpose of the deduction. Such requirements may affect some of the current normal land acquisition measures: for example, the huge relocation compensation payments made during urban redevelopment or land development projects may not be deductible, the deductibility of the land price without a proper finance voucher may be affected, etc.

Real estate companies should pay attention to the land acquisition measure and the voucher obtained after B2V reform, actively discuss with the local government possible room for maneuver, and consider certain adjustments or transitions for operations so as to mitigate the tax risk and possibility of reduced profits. In the meantime, the companies should continue to focus on whether there would be any follow-up policy at the state level to clarify certain issues or relax requirements.

In addition, there is a question whether the net-based invoice method will be applicable for real estate companies adopting the general filing method (with the land price being deductible as net basis), as well as for construction companies adopting the simplified filing method (with the subcontracting fee being deductible as net basis). Some construction companies are providing net-based special VAT invoices to real estate companies that were issued by local tax authorities on their behalf.

However, according to SAT Announcement [2016] No. 23, the net-based invoice will be applicable for the services subject to the net-based filing method, but use of the VAT invoice with the full amount will not be allowed. According to Circular 36 and other relevant regulations, land price net–based filing for the real estate industry and subcontracting fee net–based filing for the construction industry will not fall under the scope of “not allowed to issue VAT invoice with full amount.” As such, companies should pay attention to the consultation and discussion with the tax bureau responsible regarding the feasibility of filing under net basis but invoicing with the full amount.

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Provisional Taxes

The current policy requires the construction and real estate industries to pay provisional taxes, which raises the question of when and how to pay those taxes, as well as how to file taxes in the normal way.

According to Circular 36 and Announcement 18, real estate development companies that presell their self-developed real estate projects are required to pay provisional VAT at the rate of 3 percent on receiving the presale payments. However, there is no clear definition for the presale payment in the state-level regulations, and individual local STBs have different interpretations. Companies should confirm the policy on this with the STB responsible.

Provisional taxes will result in further challenges in tax reporting and filing for the real estate and construction industries. Companies should bear in mind the timing for the provisional tax filing and the timing for the normal tax filing, and report/file the VAT with the tax bureaus responsible (at the place of immovable properties and that of the company, accordingly).

In addition to the issues noted for real estate and construction industries, B2V reform also has a huge impact on various aspects of a company’s operations, including, among others, the following:

business operations reform;

financial index impact;

stronger external supervision;

upgraded internal management; and

system transformation.

In order to effectively deal with the B2V reform, the companies should focus on the following adjustments.

Business operations:

Study the B2V policy, review the current business operations based on the policy, perform numerical analysis for old projects, and make appropriate choices.

Perform B2V training, acknowledge the importance of B2V reform, and reach a consensus among different departments regarding how to deal with the challenges presented by the reform.

Review contracts, prepare templates for new contracts as well as appendixes for old contracts to incorporate B2V changes, and improve follow-up contract management.

Review major customers and suppliers, and formulate sales and purchase pricing strategies.

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Financial accounting:

Make necessary adjustments to the internal budgeting process.

Review the current business and finance system, including the accounting items amendment, the accounting treatment change, etc., and perform a system upgrade where necessary.

Tax management:

Focus on the change in the operations process, internal tax positions, staff responsibilities, tax filing, invoice management, and other operations.

Establish a VAT management system and develop an operations manual for invoices, filing, process, etc.

Optimize the business process under the VAT regime, and provide tax control and supervision.

Companies will face various challenges during the B2V reform. In order to better deal with these challenges, management and staff should pay attention, perform an impact analysis, plan, give overall consideration to the impact of the reform, prepare and perform training, and establish/revise relevant systems—all so the company can make a smooth transition and get the early advantage.

Local Preferential Policies

At the end 2014, the State Council released Circular Guofa [2014] No. 62, “Notice Issued by the State Council Regarding the Clean-up and Standardization of Preferential Policies,” which urges local governments to clean up the local preferential policies, including tax, nontax, and other financial preferential policies. In May 2015, the State Council issued Circular Guofa [2015] No. 25, which provides additional information about Circular 62. According to Circular 25:

State preferential policies shall be executed.

For the preferential policies that have been released by different regions and departments, if there is a specified time limit, such time limit applies; if there is no specified time limit but adjustment is truly needed, the local authorities and relevant government departments shall set a reasonable transitional period so that the policies can continue to be effective until the end of the transitional period.

The preferential policies under the contracts signed between the local regions and enterprises remain valid. The preferential policies already enjoyed by companies will not be clawed back.

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Any new preferential policies formulated by local authorities and government departments, except for those allowed by the laws or administrative regulations, shall be reported to the State Council for approval before implementation if they are related to a tax-revenue or non-tax-revenue fund set up with the approval of the central government. Other preferential policies can be implemented after approval by the local authorities and relevant government departments.

This treatment under Circular 25 is very positive for the companies (including real estate companies), compared with Circular 62.

Circular 25 also provides the principle guidance regarding whether it is still possible for companies to obtain new local preferential policies. Per Circular 25, the local authorities and government departments can only implement new preferential policies that are not related to tax-revenue or non-tax-revenue funds. This should be considered as a tightening of the policy from the companies’ perspective.

After the release of Circular 25, issues such as unresolved applications for preferential treatments by companies at the local level, and implementation of the currently available preferential treatments, are gradually being resolved.

Nevertheless, Circular 25 still has not addressed certain issues, such as transfer of land at a preferential price or at no cost, transfer of state-owned assets at a low price, and financial bonuses or subsidies. Therefore, for those uncertain matters, companies should initiate dialogues with their local authorities and government departments.

Author

Kenneth RheeChief Executive Officer, Huhan AdvisoryChief Representative, Chinese

Mainland, ULI

Project Staff, ULI Asia

John FitzgeraldChief ExecutiveULI Asia Pacific

Abel XuDirectorHuhan Advisory

Cindy ZhangAnalystHuhan Advisory

Project Staff, ULI Americas

Anita KramerSenior Vice PresidentULI Center for Capital Markets and Real

Estate

Eva SuDirector ULI Center for Capital Markets and

Real Estate

ULI Editorial and Production Staff

James A. MulliganSenior Editor/Manuscript Editor

Betsy Van BuskirkCreative Director

Anne MorganGraphic Designer

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2001 L Street, NW, Suite 200 Washington, DC 20036 www.uli.org

ULI Asia Pacific Level 16, Nexxus Building 41 Connaught Road Central, Hong Kong [email protected]

ULI Japan COI Uchikanda Building 8F, 3-2-8 Uchikanda, Chiyoda-ku Tokyo 101-0047 [email protected]

Documents

Urban Land Institute Chinese Mainland Real Estate Markets 2016asia.uli.org/.../sites/2/2012/04/China-survey_EN_WEB_2016-9-14.pdf · Urban Land Institute Chinese Mainland Real Estate