Green shoots in China's housing market
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
The London office investment market is in the early stages of a cyclical recovery.
The first stage began in 2023 with the return of private capital investors. These investors are less reliant on debt than some competitors and were happy to underwrite risk due to the market's improving leasing fundamentals. Private equity investors led the second stage last year as they sought out mispriced assets..
While this is positive, it is embryonic: investment volumes hit a fifteen-year low in 2024. The next phase of the recovery will require greater activity from institutional investors able to access (relatively) cheap capital for larger lot sizes. Their return would support a recovery in purchases of so-called 'core' assets, which are properties in prime markets let to creditworthy tenants on long leases. Investment in core assets represented more than half of London's office market turnover as recently as 2023, before falling to less than a fifth last year.
Early movers
This part of the market now presents investors with compelling opportunities, according to the third insight paper in Knight Frank's London Series, released by Shabab Qadar, Nick Braybrook, and Dan Dixon this week.
Mispricing in the sector presents an opportunity for early movers to achieve returns comparable to riskier assets but with reduced exposure, driven by rising rents and yield compression. Indeed, prime office rents have grown at a fast clip amidst constrained supply (see the second insight paper from Lee Elliott for more on that), with core submarkets projected to see annual average growth of almost 6% over the next five years. Investors in well-let core assets could achieve double-digit geared returns, the team suggests.
We are already seeing institutional and sovereign wealth activity that has largely been absent for the last two years. Institutions from APAC and Europe, where interest rates are lower, are most likely to be the first movers, gaining most from the arbitrage opportunity. Momentum is likely to build as rental growth strengthens and financing conditions improve.
The FT checks in on the worsening shortage of prime City of London offices from the rarified air of the upper floors of 22 Bishopsgate: “The supply pipeline fell off a cliff because of Covid. So you have got this black hole of availability between now and probably 2030,” Knight Frank's Katie Oliphant tells the paper. “Because the City buildings are so big, the effect [of] all of this actually takes longer to rectify.”
Green shoots
China's housing market represents a large chunk of an economy that in turn represents a large chunk of global GDP, so the success or otherwise of the government's efforts to stabilise the market will be felt way beyond Beijing.
The market contributes between 17% to 29% of China’s GDP, depending on the industries included. Meanwhile, China's economy contributes almost a fifth of global GDP. Real estate downturns tend to have an outsized impact on sentiment, homes represented almost half of household asset holdings in 2022, compared between 15% and 30% in economies including the US, France, Germany, and Japan.
Green shoots appeared late last year, and data has since suggested stable conditions might soon be sustained. New-home prices in 70 cities, excluding state-subsidized housing, fell just 0.07% in January, according to official figures covered by Bloomberg. That follows a 0.08% decline in December.
The IMF upgraded its forecasts for Chinese growth in January. The group now expects a 4.6% expansion this year, though it's worth noting that that upgrade came on the back of "an improved outlook for external trade", which has since taken a turn for the worse.
Mortgage rates
'Hotter inflation: does it matter?,' I asked on Wednesday after official figures showed the UK's annual rate of inflation had climbed to 3% in January.
I noted that this rise was baked into forecasts released by the Bank of England earlier this month, and mortgage lenders had cut rates anyway. The latest round of cuts had been led by Santander, which had two- and five-year deals at 3.99%.
Santander announced yesterday that it will withdraw that five-year rate later today. It's too soon to know whether this represents a broader uptick in rates, or the lender is simply being inundated with calls and is seeking to maintain service levels. A reminder that Tom Bill pored over the uncertain outlook for UK mortgage rates on Monday.
In other news...
Wall Street's new money is shaking up the ranks of the super wealthy (Bloomberg).