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How WTO Entry Will Impact the China Real Estate Market

 

WTO entry sends a positive message to foreign companies about China’s commitment to economic and market reforms. Demand from foreign companies - the primary occupants of top-quality commercial, industrial and residential projects – is likely to increase as new companies enter the market and others expand as restrictions are gradually lifted.

It is, however, premature to say exactly how much the real estate market will benefit. To predict that WTO entry will mean rising rents and demand for more construction in the short term is, perhaps, misguided.

The impact will be gradual and unevenly spread amongst businesses and in different areas of China. Financial services, telecommunications, distribution and logistics, information technology, agriculture, and professional services industries, as well as Chinese consumers, are likely to be significant winners.

Dyfed Evans of Cushman & Wakefield in Shanghai notes that Shanghai will see benefits due to easing of restrictions on financial services companies. "Banks and insurance companies are a major industry sector in Shanghai, and the lifting of restrictions on their activities could unleash significant latent demand for real estate as the reforms take hold".

Evans continues "The lifting of trade restrictions, the lowering of tariffs and the easing of restrictions on distribution over the next five years will be a boon for warehousing, logistics and distribution real estate in China’s busiest port city, as well as in the rest of China."

While WTO entry may encourage a recovery in real estate markets sooner than otherwise expected, almost every major market in the country remains vastly overbuilt. In the office sector, the vacancy rate for Grade A buildings is presently 30% in Beijing and 38% in Shanghai. Based on recent trends in demand, this vacant office space will take two to three years to be absorbed, and there is more construction underway.

In the medium to long term, the institutionalized reforms required by WTO rules are likely to have a positive impact for real estate investors and occupiers as a result of increased business activity and the more systematic development of China’s economy as a whole.

Cushman & Wakefield’s Beijing Chief Representative, Randy White, said "The commercial and residential markets are overbuilt because too many developers rushed into China at the same time, and the strong demand was just not enough to fill the space. WTO will be a boost on the demand side, and may just fulfill some of the hopes that investors had when they came to China."

Based on a forecasting model developed by Cushman & Wakefield Research, a 1.5% increase in GDP growth (a figure suggested by China’s State Council Development Research Center) could increase demand for offices by an additional 20 percent in major Chinese cities.

Like the commercial market, the expatriate housing market will be positively affected. While certain companies have been reducing expatriates in the last several years (or at least the proportion of expatriates to overall employees), the wave of new companies coming to China will likely bring more senior expatriate managers. However, there is probably no Motorola or Shell waiting to enter China and it is expected that the majority of newcomers will be small to medium-sized businesses.

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