_China's real estate market: A gradual road to recovery

As we look ahead to the remainder of 2024, China's real estate market remains a focal point of global economic interest. Following significant policy adjustments and market recalibration, the sector shows signs of gradual stabilisation.

We speak with Jonathan Rideout, Head of Office Strategy and Solutions, Shanghai, and Geraldine Xiao, Director, Occupier Strategy and Solutions, Asia-Pacific, to examine the key factors shaping its trajectory.

Based on current trends, how do you see China's real estate market evolving through the end of 2024? What key factors or potential developments should we be watching?

Jonathan: China's real estate market will likely continue its gradual stabilisation through the end of 2024. We are seeing several key factors shaping the market:-

Government policies: The central government's emphasis on the 'housing is for living, not speculation' policy continues to influence the market. We expect further fine-tuning of policies to support market stability.

Economic recovery: As China's economy continues to rebound post-pandemic, we anticipate a cautious improvement in investor sentiment. China's GDP growth is expected to reach around 4.5-5% in 2024, driven by domestic consumption recovery and fiscal stimulus.

Tier-1 cities: Major cities such as Beijing, Shanghai, and Shenzhen will likely show more resilience, with the potential for modest price growth.

Lower-tier cities: These markets may face more challenges, with oversupply issues in some areas.

Commercial real estate: The office sector in tier-1 cities shows signs of recovery, while retail continues adapting to changing consumer behaviours.

Industrial and logistics: This sector remains strong, driven by e-commerce growth and supply chain reconfiguration.

Key factors to watch include:

• Further policy adjustments, especially regarding property developer financing
• Consumer confidence and its impact on residential sales
• The pace of economic recovery and its effect on commercial real estate demand
• Potential regional disparities in market performance

In terms of outperformance, we are closely watching the industrial and logistics sector, particularly in strategic locations around major economic hubs. However, it's important to note that the market remains sensitive to policy changes and global economic conditions.

What are the sectoral growth and the demand drivers? Which sectors currently drive China's most demand for office and industrial space?

Jonathan: Life sciences: The sector has grown 15-20% annually (2015-2018) and is expected to continue developing as one of China's most diverse and expansive sectors.

Semiconductors: China is aggressively expanding chip production capacity, forecast to add more new capacity in 2024 than the rest of the world combined.

Manufacturing: High-end manufacturing is seeing increased competitiveness globally.

Technology: The tech sector is expected to lead office leasing demand.

Research and development: Increasing focus on innovation across pharmaceuticals, biotechnology, and semiconductors sectors.

How is the recent push for semiconductor self-sufficiency affecting demand for manufacturing and R&D facilities?

Geraldine: China has significantly ramped up its investments in semiconductor manufacturing and R&D facilities. For instance, Shanghai recently injected $1 billion into its Semiconductor Industry Investment Fund, doubling its size to about $2 billion. This increased funding will likely drive demand for new and expanded manufacturing and R&D facilities.

Growth in domestic chip production:

China's efforts to boost domestic chip production have led to an increase in manufacturing capacity. The country's semiconductor industry revenues are projected to reach $238 billion by 2027, growing at a CAGR of 6.16% from 2024 to 2027. This growth trajectory suggests a continued expansion of manufacturing facilities.

Focus on advanced chip manufacturing:

China is pushing to develop more advanced chip manufacturing capabilities. While currently able to mass-produce 14nm chips, efforts are underway to produce 7nm and 5nm chips. This drive towards more advanced technology is likely increasing demand for cutting-edge R&D and manufacturing facilities.

What types of spaces are life sciences companies looking for, and in which regions?

Geraldine: Life sciences companies in China are primarily seeking specialised spaces such as dry and wet laboratories, purpose-built R&D facilities, and manufacturing spaces in dedicated biomedical parks. These companies are looking for properties with specific features such as multiple floor traps for flexible lab configurations, high ceiling heights with generous vertical risers already to accommodate lab hoods and venting channels, and high floor loading, rooftop loading to accommodate internal and external lab equipment. The demand is particularly strong in major life sciences clusters such as Shanghai, Beijing, and Suzhou. In Shanghai, for example, the Zhangjiang submarket has seen the most active life science leasing activities, with expansion demand and new setups from companies over the past two years. Other emerging popular locations for life sciences companies include Waigaoqiao, Kangqiao, and Lingang submarkets.

Are you seeing increased interest from international firms in setting up R&D centers in China?

Jonathan: There is indeed increased interest from international firms in setting up R&D centers in China. For instance, Volkswagen recently invested around 1 billion euros to build an R&D, innovation, and procurement center for electric cars in Hefei. Companies such as Xylem, Schneider Electric, and Volvo have also recently opened or expanded R&D centers in China. This trend is supported by government policies encouraging the establishment of foreign-funded R&D centers. From 2012 to 2021, R&D investment by major foreign-funded industrial enterprises in China increased by 91.5%, indicating a strong and growing interest in R&D activities in the country.

How are office tenants' requirements changing regarding location, amenities, and sustainability features?

Jonathan: Office tenants' requirements in China are evolving in several ways. In terms of location, there's a trend towards premium office spaces in quality locations, as tenants downsize but seek better environments. Many companies are choosing super high-rise towers in city centers or central business districts (CBDs) as their headquarters. However, due to limited land availability in CBDs and continuous urban expansion, there's also growing interest in low-density industrial campuses in fringe urban regions.

Regarding amenities, work-related features that support specific work needs (like concentrated effort, private calls, or team collaboration) are becoming increasingly important. Shared amenities like lounges and work booths are desired to foster a sense of community. The benchmark in China is 12-18% of space allocated to amenities, with a need for comprehensive "one-stop" shared-service amenity areas.

Sustainability features are gaining prominence, with buildings boasting green credentials in high demand. Life sciences firms, in particular, are willing to pay a premium for spaces with strong sustainability credentials. Many upcoming developments are targeting Green Mark Platinum certification or similar sustainability standards.

Flexibility is also a key consideration, with growing demand for flexible office spaces and leasing options. Modular layouts and movable partitions are becoming more popular to allow for easy reconfiguration, and multi-functional spaces that serve different purposes are in demand.