Macro Forum: The Street View
China: Demographics, Digitisation, Data and Demand
The catalogue of China’s macro challenges is obvious and well-rehearsed. Trade tensions, a rising debt burden, misallocation of capital and environmental shortcomings are familiar headline grabbers.
Less appreciated - it’s a vast country with many sub plots. The collage of cities, regions, climates, income disparities, and cuisine provides different challenges and opportunities on a vast scale. Most of all there is a huge domestic demand - retail sales exceeded the US by nearly $100 bn in 2018 - and low levels of household debt. Close local knowledge of these differences and a differentiated product offering are essential for a successful investment strategy, not least in real estate.
One key benefit of spreading economic growth inland is the income and consumption growth of a much larger portion of the population. The size and sophistication of Chinese e-commerce dwarfs anywhere else on the planet. This in turn is shifting the movement of goods from predominantly export driven to intra-regional. From a real estate perspective, we see the demand for modern logistics warehouses expanding from predominately Tier-1 markets into Tier-2 and Tier-3 cities. With a short development cycle, assured tenant demand, and an abundance of global and domestic capital seeking stabilised logistics assets, we continue to believe returns from build-to-core strategy for modern logistics facilities in key population centres across the country are attractive.
Another plus from e-commerce and the wider adaptation of internet and mobile usages is demand for data centres as an emerging real estate asset class. Despite the mature infrastructure in both broadband and mobile Telecommunications as well as power, the development of truly independent carrier-neutral data centres have lagged due to the higher barrier of entry in terms of technical skills as well as regulatory and licensing requirements. With minimal presence of global data centre operators and only a small number of domestic ones, we believe this is fertile ground for early movers in China.
While industrial asset types such as logistics and data centres are expanding beyond major Tier-1 cities, we continue to keep an eye on these gateway markets. As they have grown to become some of the largest metropolitan zones in the world, old suburban areas have become new commercial districts. Land in prime location is scarce and highly valuable. Fast-paced evolution of these Tier-1 cities over a short period means that many of the older buildings in their prime CBDs are already obsolete, thus presenting a lucrative opportunity for repositioning and refurbishment.
A prime example is Actis’ new office in Shanghai. This is located in a newly refurbished mansion built in early 20th century located within one of the city’s main CBDs. The same office compound was transformed from a run-down state-owned enterprise office campus to a thriving hub of companies ranging from tech start up to fashion designers and from boutique law firms to domestic and foreign investment firms, including Actis.
Such opportunities in Tier-1 cities are boosted further by the policy driven de-leveraging of private enterprises who own many of these centrally located but underused or underperforming assets. We are already seeing assets being offered at well below replacement cost level by such distressed sellers.
As China goes through much needed structural changes, continuing shifts in intra-regional dynamics will persist. Demand for logistics, data centres, prime location commercial assets and other real estate asset types linked to sustainable unmet demand from a vast domestic population with growing income is exciting and immense. Stay tuned.