Following a record-shattering 2016 where transaction volumes in China reached an amazing RMB 209 billion (US$30.8 billion) – a 52 per cent y-o-y increase – 1H17 commercial investments appear to be a continuation of this trend.

Total investments in China in the first half of the year reached RMB 80.8 billion (US$11.9 billion), a 44.8 per cent y-o-y increase. Offices continue to be the most popular investment asset, totalling RMB 40.2 billion (US$5.93 billion) – or nearly half of all investment volumes (49.8 per cent).

2Q17 breakdown shows shift in investor interest

In 2016, Shanghai accounted for over 45 per cent of total investments in China, and domestic buyers accounted for 85 per cent of all sectors. While 1Q17 transactions were reminiscent of 2016 numbers, a closer look at the data indicates a shift in investor interest.

Investment volumes in Shanghai fell to 34.8 per cent of total investments in China in 2Q17, compared to last quarter’s 45 per cent.

Although it may be premature to say gateway cities in China are losing steam, it appears Tier 2 and Tier 3 cities are gaining investor interest, with Wuxi, Suzhou, Nanjing, Hangzhou, Dalian and Zhuhai all seeing major transactions.

Rise of foreign investment in China

The increase of foreign investment is another major phenomenon we observed in 2Q17. Foreign investment accounted for less than 20 per cent of all transactions in the last two years, as these investors were reluctant to chase prices in China. In 2Q17, however, foreign investors accounted for 36.6 per cent of all investments.

Among foreign investors, Hong Kong topped the list with 13.9 per cent of all China transactions in 2Q17.

Domestic buyers continue to be dominant buyers in China

With capital flow controls, domestic buyers will continue to dominate in China. The same higher asset prices that resulted in yield compressions also sidelined foreign investors in the past, a trend that is likely to continue.

It is difficult to predict if foreign investors are starting to become more active in China, but the phenomenon in 2Q17 is encouraging as it indicates they are still keen and actively seeking opportunities.

In terms of geographical area, after two years of frenzied buying, Tier 1 cities in China have become too expensive for many. The decline in transaction volumes in gateway cities stems from a limited amount of quality assets available for sale, and prolonged decision-making as sellers stood firm on their price, leaving limited discounts for buyers.

For both domestic and foreign investors who are actively seeking value and return, Tier 2 and 3 cities could return to the investor spotlight and become cities to lookout for in the next few quarters.