Colliers Research anticipates that the China commercial real estate markets will continue to be largely stable in the short-term.
Background: On 11 August 2015, the People’s Bank of China started to allow its RMB currency against the USD to float towards a more market-driven level. As a result, the RMB depreciated by nearly 1.9% against the USD on 11 August, followed by further depreciations of approximately 1.6% on 12 August and 1.1% on 13 August, respectively. These adjustments were the largest in at least a decade, as Figure 1 demonstrates. What does this change mean for China’s real estate market and domestic market players? Colliers Research has looked at examples in Japan and Australia and interviewed our senior executives working on outbound investment transactions to analyse potential effects of the monetary change on the China real estate market and market players in the short-term.
Unlikely to lead to a downturn in the real estate market
A number of empirical market studies suggest that local currency depreciation against the major international currencies, such as the USD and GBP, does not necessarily lead to a downturn in the real estate market. For example, in Japan, when the JPY depreciated by 13% against the USD from 1988 to 1990, the land prices of the real estate market increased and the market became attractive to overseas investors. According to the Japanese Ministry of Land, Infrastructure, Transport & Tourism, the average residential land price and average commercial land price in Japan increased by 23% and 41%, respectively, between 1988 and 1990, largely attributed to the growing demand and stable fundamentals in the local market. In Australia, the AUD continues to depreciate against the USD, but the overall impact on the real estate market is minimal, Nerida Conisbee, Director of Research, Colliers International, Asia Pacific argues. China is now the largest offshore investor in Australia, overtaking the U.S., Canada and Singapore, and this trend should continue in the next 12 months at least.
Further RMB depreciation is expected
While further RMB depreciation against the USD is inevitable in the near-term, a continuous long-term depreciation is not expected, according to the PBOC (PBOC, 12 August 2015). China’s economy continues to grow at a fast pace, relative to most other major economies in the world, and the central bank continues to have the flexibility to govern the RMB currency.
However, market consolidation in the residential sector will continue
China’s residential real estate market is currently in a state of consolidation and divergence. The market is predominately driven by domestic purchasers. While the demand in the first tier city markets, namely Beijing, Shanghai, Guangzhou and Shenzhen will remain sustainably strong, that in the non-first tier cities are considerably diluted by the massive new supply at present. No change in this pattern of consolidation and divergence is expected as a result of the RMB depreciation against the USD.
Developers with overseas funding will review their strategy in China
Developers who have received levels of overseas funding will need to re-assess their business strategies in China and hedge against losses. Those with particularly high gearing of overseas funding may dispose of assets in light of increased financial pressure.
Outbound investment activities should continue to increase
The RMB depreciation does make U.S. real estate more expensive for Chinese buyers, which may catalyse a “think twice” sentiment before a decision of acquisition is made. However, this should not dampen the growth momentum of the Chinese outbound investment activities, according to Lina Wong, Head of Investment Services, China, Colliers International. Only if a further significant devaluation occurs, e.g., 10%-20%, a more negative impact on this segment would be noticeable, argues Wong. It should be envisaged that individuals and companies who must convert their capital from the RMB to the USD will have to re-evaluate whether their returns on investments in the U.S. real estate are sufficient to cover the additional cost. In addition, major companies embracing the going overseas plans and activities such as Greenland Holdings and Xinyuan Real Estate, which are listed on the Hong Kong and New York stock exchanges, respectively, will be more insulated, as they raise a portion of their capital by selling dollar-denominated bonds or stocks outside of China.
Chinese properties become relatively less expensive
The RMB depreciation will effectively lower capital investment costs for overseas investors into China. However, research findings of the Global Investor Sentiment Survey by Colliers International suggest that currency risk is seen as a relatively minor issue when making a decision as to where to invest.
Institutional real estate investors normally do not make investment decisions based on currency exchange risks, as they do have the options to hedge such risks with financial instruments, though with greater costs. Such investors make their investment decisions based on long-term economic and property market fundamentals, which substantially affect the investment returns and these factors cannot be hedged.
Summary
Colliers Research anticipates that the China commercial real estate markets will continue to be largely stable in the short-term, assuming the depreciation of the RMB against the USD remains below 10%, relative to the level before the monetary adjustment. It is our view that a drop of 20% would have a more discernible impact, which however is unlikely to happen.
The long-term prospect of the domestic commercial real estate market will continue to rely on China’s overall economic fundamentals instead of a single monetary policy, though the recent change may lead to strategic reviews for some companies in the short-term. In view of the residential real estate market, the ongoing consolidation and divergence will continue but the impact of the RMB depreciation against the USD on the sector is minimal.
View the entire report on Colliers International here.