A RESEARCH PUBLICATION

C H INA R E P O RT
A LAND OF OPPORTUNITY IN
A GLOBAL CRISIS

For more information, please contact:

France Houdard
Executive Managing Director
Cushman & Wakefield Greater China

France.houdard@ap.cushwake.com
Direct: (86 21) 2320 0878
General:(86 21) 2320 0808
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

C H I N A R E PO RT | J U N E 20 0 9 2
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

CONTENTS

1. Preface
2. Hotel Market
3. Retail Market
4. Office Market

PREFACE In an effort to stimulate the economy through

the financial crisis – and sustain an 8% economic
In this paper, we argue that while China will
growth rate – China put forward a RMB 4
experience some moderate near-term negative
trillion (USD 586 billion) investment package.
impacts from the current global economic
The stimulus package was broadly outlined to
crisis, the underlying fundamentals that made
be directed in the areas of infrastructure, rural
China an attractive investment destination for
development, housing, technology, healthcare
investors – whether multinational corporations,
and education.
developers or investors – remain just as strong
and compelling, before, throughout and after the
Stimulus packages aside, the perennial question
global financial crisis.
around the growth of consumption within the
China economy remains a central focus, as well
From an overarching macro-economic
as the country’s ability to migrate structurally
perspective, China’s economy continues to be
from a largely investment- and production-
relatively insulated from the global crisis. It is
driven economy, to an increasingly service-based
undergirded by healthy balance sheets, at the
economy. At present, private consumption
banking, corporate and household level. The
accounts for 37% of China’s economy, as
financial system has abundant liquidity and non-
compared to 56% for Germany and 71% for
performing loans have been drastically reduced
the United States.2 In looking at just retail sales
over the last decade. Foreign exchange reserves
growth in the first quarter of 2009, the figures
have nearly quadrupled in the last four years, the
show a robust sustained nominal retail growth
Central Bank having accumulated over USD 2
rate of 15%.3 While figures certainly are never
trillion in foreign reserves.
a tell-all, it was interesting, if not surprising, for
many to observe China automotive sales reach
For many, the key touchstone for China’s health
2.64 million units, surpassing the United States
is the magic number “8”: Will China succeed in
in assuming the world’s number 1 position in car
sustaining its 8% GDP growth rate? As the global
purchases.4
economy took a deep dive, reputed banks and
economists issued forecasts that largely ranged
Finally, on the economic front, the great focus
in the sub-8% space, ranging between 5 and 7
and debate around the state of China’s exports
percent. More recently, however, forecasts have
and its potential impact on the overall economy
continued to edge upward, with forecasts from
continues unabated. The degree to which a slow-
the major established banks ranging between 7%
down in trade might impact GDP seems to result
and 8.3%.1
in frequent overstatements of China’s export

1 Goldman Sachs, Morgan Stanley, Royal Bank of Scotland, UBS

2 International Monetary Fund (2008)
3 China National Bureau of Statistics
4 China Association of Automobile Manufacturers

C H I N A R E PO RT | J U N E 20 0 9 3
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT
A C & W C H I N A R E S E A R C H P U B L I C AT I O N
dependency. By comparison, China’s dependency
on exports is much less than its neighbors,
Singapore and Korea, and roughly equal to
that of Japan. The export-portion of GDP is
calculated based on the sum of value-add exports
(only approximately 18% of GDP), rather than
gross exports (approximately 40% of GDP).5
In summary, the broad China fundamentals that
made it a highly attractive investment destination
before the global financial crisis show strong
signs of persistence. This includes a mix of
immense forex reserves; a colossal stimulus
package backed by a government with focused
authority to deploy; low inflation; strong balance
sheets across the economy, from banking, to
corporations and the family unit; and sustained
high levels of retail growth. The economic
fundamentals aside, corporate investment drivers
that underpinned foreign investment also remain
strong: low costs; large market; and rapidly
expanding innovative resources. In the context of
a global financial crisis, where major corporation
are facing immense pressures to reduce their
global structural costs and grow revenues, while
driving innovation and shortening product life
cycles, the China market bodes quite well in
comparison and contrast to many other markets.
It is within the above context that this paper
will examine opportunities specific to the real
estate sector. Rather than focus on all aspects
of the industry, we sought in this paper to
bring attention to the dynamics specific to
three segments of China’s real estate economy:
hospitality, retail and office.
HOTEL MARKET
In recent years, China has been experiencing
an extraordinary boom in tourism demand and
hotel supply. Although the recent economic
5 Deutsche Bank, UBS
6 BTA – Beijing Tourism Administration (March 2008)
7 National Tourism Administration of the People’s Republic of China (2000 – 2008)
8 National Tourism Administration of the People’s Republic of China (2008)
9 National Bureau of Statistics (February 2009)
C H I N A R E PO RT | J U N E 20 0 9
environment has had some impact on the sector,
there continues to be many opportunities.
Both Beijing and Shanghai are already the
major global hotel markets with all mainstream
international brands already present, frequently
with multiple properties/same brands throughout
the city. Beijing has become one of the largest
urban hotel markets in the world with estimated
806 star-rated hotels offering some 130 thousand
rooms by the end of 2008.6
This hotel development has not been
concentrated only in primary cities. Overall, the
hotel supply in China has been growing at over
1,000 properties per year on average between
2000 and 2008, recording 11.4% average
annual growth.7 The China National Tourism
Association (CNTA) expects that further
200,000 transient accommodation properties will
be built by 2015, including about 10,000 star-
rated hotels.
In 2008 the China tourism industry
generated over RMB 1.16 trillion in revenues
(approximately USD169 billion) with nearly 76%
generated domestically by Chinese consumers.8
This disproportionately high domestic share of
tourism revenues -- 76% -- being generated by
Chinese consumer provides China’s tourism
market with some immunity to the impacts of
the global financial and economic crisis that is
negatively affecting primarily the international
travel. For example, in 2008 the inbound travel
to China declined by 1.4%, however, this was
more than offset by the robust growth of
domestic travel at 6.3% over the same period.9
The extraordinary expansion of China domestic
travel is driven by the growing economy (and the
resulting business travel) as well as the massive
upward shift in disposable incomes across the
4
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT
A C & W C H I N A R E S E A R C H P U B L I C AT I O N
middle class (approximately 400 million people),
and an unparalleled urbanization phenomenon
(where 150 million people will be migrating
to cities in the next 6 years) that results in a
strong demand for leisure travel, particularly
from China’s growing middle class. However,
China’s domestic market also represents a
great potential for luxury hospitality products.
According to recently released Hurun Wealth
Report there are estimated 825,000 millionaires
in China today, owning over RMB10 million
(nearly USD1.5 million).
Over the long-term, the outlook for the
hospitality industry remains very positive. By
2015, the country is expected to rank as the
world’s number one inbound and domestic
tourism destination, attracting over 100 million
inbound overnight visitors and 2.8 billion
domestic travelers.10
The buoyant Chinese tourism market has been
attracting many hotel developers and operators,
resulting in significant growth of hotel supply
across all hotel tiers, from luxury to budget
properties. In particular, the five-star markets
in Shanghai and Beijing are experiencing a
major influx of supply with over 15,500 rooms
and approximately 6,000 rooms respectively
estimated to enter the market between 2009
and 2012.11 Overall, CNTA estimates that by
2015 there will be over 23,500 star rated hotels
in China, approximately 65% more compared
to 14,300 hotels in 2008.12 While this growth is
substantial, the total hotel supply is still relatively
low compared to major economies such as
the US that currently has 50,600 hotels with
4.7 million rooms, showing that China still has
potential for growth.
10 World Tourism Organization as reported by China Hospitality News (November 21, 2008)
11 C&W Research
12 CNTA - China National Tourism Administration (2008)
13 National Tourism Administration of the People’s Republic of China (2000 – 2008)
C H I N A R E PO RT | J U N E 20 0 9
Hotel Opportunities
Despite current oversupply issues in both Beijing
and Shanghai, further operators are very keen
to enter and consider Shanghai and Beijing as
their primary targets in Asia. The interest of
operators is driven by the growing importance of
both cities as Asian commercial hubs and tourism
gateways to China. In 2008, Beijing captured over
17.4 million international visitor nights. Shanghai
recorded even higher inbound visitation with
more than 19.5 million inbound nights generated
by some 6.4 million foreign travelers.13 This is
just 3.4 million visitors less when compared to
New York.
Attracted by booming domestic tourism, major
Chinese economy hotel operators/brands such
as Home Inn, Jinjiang Inn and Motel 168 continue
to expand as are the international brands such as
Ibis (Accor), Days Inn (Wyndham), and Holiday
Inn Express (InterContinental).
Resort developments are also experiencing
a boom. Hainan Island, a popular holiday
destination, saw seven hotel openings in 2008.
Furthermore, many ‘break-away’ resorts in
proximity to major urban areas have emerged
or are underway such as Shimao Wonderland
Intercontinental in the Greater Shanghai area,
as well as several ski resorts throughout north
China.
5
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

Opportunities for overseas investors: Number of Star Rated Hotels in China

• Strategic investments into local chains

• Acquisition of distressed assets in primary
cities
• Acquisition of divested state-owned hotels/
portfolios
• Resorts in proximity to major urban areas
(golf, spa, ski resorts)

* Compound Average Annual Growth

China’s Inbound Tourism 2000-2015F China’s Domestic Tourism 2000-2015F

* Compound Average Annual Growth * Compound Average Annual Growth

Source: China National Tourism Administration, World Travel Association Source: China National Tourism Administration, World Travel Association

Hotel Transactions

Lead Vendor Project Area/Room Est. Location Type

Purchaser / Count Purchase
Investor Price (RMB
Million)*
Fashion Wise Pine (Jin Portfolio including Jinmao Tower Various Share
Properties Mao Group) in Shanghai, JW Marriott Shenzhen, 11,000 locations Acquisition
(60%-100%)
(China) Ltd. Ritz-Carlton Sanya and Westin
Beijing
Shanghai South Pacific Shanghai Four 439 rooms Shanghai Equity
Industrial (subsiduary of Seasons Hotel 1,510 Acquisition
Holdings SIIC) (87%)
Limited
Open Land Beihai Yinhe Hi- Guangxi 46,000 sqm / Nanning Share
Holdings tech Co., Ltd. Wharton 338 rooms 560 Acquisition
Limited International (100%)
Hotel
China Lai Sun Ritz-Carlton 216 rooms Hong Kong Share
Construction Development Co., Hotel Hong 467 Acquisition
Bank (CCB) Hong Kong Kong (for (10%)
redevelopment
to office )
Huatian Hotel Changchun Changchun 82,500 sqm / Changchun Share
Co., Ltd. Jian Real Estate Huatian Hotel 526 rooms 400 Acquisition
Development (100%)

C H I N A R E PO RT | J U N E 20 0 9 6
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

Hotel Transactions

Lead Vendor Project Area/Room Est. Location Type

Purchaser / Count Purchase
Investor Price (RMB
Million)*
Parkway Hotel Goldman Sachs ANA Grand 59,000 sqm / Xi'an Acquisition
(Singapore) Group Castle Hotel 338 rooms 400

Beijing Capital Beijing Tourism Qianmen Jianguo 410 rooms Beijing Acquisition
Tourism Co., Int'l Hotel Co., Hotel /38,000 sqm 335
Ltd. Ltd.
Hunan Huatian Hubei Shuanghuan Triumphal Arch 247 rooms Wuhan Share
Hotel Co., / Wuhan Xudong Hotel 295 Acquisition
Ltd. (100%)
Ching Chu Shanghai Jianhua Jianhua Oriental approx. 18,000 Shanghai - Acquisition
Real Estate Property Apartment sqm GFA 280 Pudong
Development Development Co., (conversion to
Co., Ltd. Ltd. hotel)
Guangxi n/a Guangxi Yulin 143 rooms 246 Yulin Acquisition
Yuchai Hotel Co., Ltd (100%)
Machinery
Co., Ltd.
Hunan Huatian Hunan Branch International To be 230 Changsha Share
Hotel Co., of Bank of China Finance converted to a Acquisition
Ltd. HK Yong Heng Building (for hotel with 500 (100%)
Company redevelopment rooms
into Hotel)

Source: Cushman & Wakefield Analytics

RETAIL PROPERTY MARKET While retail sales are growing rapidly, the
amount of retail space available is growing more
China’s retail sales in 2008 have performed
rapidly still. Where total stock is increasing
well with 21.6% year-on-year.14 The Chinese
more rapidly than retail sales, this tends to put
government is very focused on driving the
downward pressure on average rentals and
consumption portion creating internal demand
in both Beijing and Shanghai, rentals for most
within the economy strike. The most recent
centers are falling. Rentals for prime space on the
government measures include providing retail
other hand have remained strong.
vouchers to less well-off urban families to
stimulate retail spending.

Major Retail Investments

Purchaser Vendor Project Area Purchase Location

(Sq.M.) price (RMB)
COF III SRL Deluxe Family Co., Ltd. Chang Chun Teng 20,661 339 Shanghai
Building
Blackstone VXL Capital Ltd. Changshou 42,000 1017 Shanghai
Commercial Plaza

Source: Cushman & Wakefield Analytics

14 China National Bureau of Statistics

C H I N A R E PO RT | J U N E 20 0 9 7
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT
A C & W C H I N A R E S E A R C H P U B L I C AT I O N
Demand continues to be firm both from brands
established in China and from new entrants.
In 2008, there have been a number of major
overseas retailers entering the China market,
including Marks and Spencer, a UK department
store operator whose first store opened in
Shanghai.
A number of other overseas retailers have
announced plans to enter the market including
Berghaus, the British outdoor clothing and
equipment brand, and Central Group of
Companies, one of the biggest department store
retailers in Thailand.
Major Chain Store Sales As % Of Total Retail Sales
Source: Cushman & Wakefield Analytics
Some retailers are now reviewing their China
portfolios and, after aggressive expansion,
they are selectively closing stores with poor
performance, and these include Park n Shop,
B&Q and Starbucks. Chain retail still has a long
way to go in China. In 2008, we estimate that the
top 100 retailers will account for around 12% of
China’s total retail sales. The fact that in the US
and in Europe a single retailer such as Wal-Mart
or Tesco can account for a similar percentage
of sales to China’s top 100 retailers, shows the
huge potential in the China market.
In 2008, there were limited investments in retail
property, not through lack of demand, but more
due to lack of appropriately priced attractive
opportunities.
C H I N A R E PO RT | J U N E 20 0 9
Gross Yields
Beijing Shanghai
Prime Shopping 7%-10% 7%-10%
Centre
Source: Cushman & Wakefield Research
Gross yields are defined as rental income after deduction of management
fees, but before deduction of taxes divided by purchase price excluding
acquisition costs.
Retail Investment Opportunities
Major residential developers in China have,
in some cases, built small portfolios of retail
investments, and these developers are now
keen to free up cash by selling some of these.
In addition, Chinese developers are therefore
keen to build retail, but they generally have
limited experience of creating successful retail
environments and therefore there is a strong
role in the market for overseas players with a
strong retail development or retail management
track record.
Opportunities for overseas investors:
• Shopping centers owned by residential
developers needing cash
• Retail schemes with direct access to metro
networks
• Refurbishment opportunities in established
pedestrian retail areas
• Investment in Tier 2 and 3 cities with
attractive retail environments
• Role as minority shareholder and asset
manager
Gross yields for office property vary from 6%
to 10% at present, with higher quality offices
which are in relatively short supply tending to
outperform in terms of rental, thus achieving
higher yields.
8
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

office property market
China major metropolitan cities were
characterized by a huge increase in office supply
in 2008. The Shanghai Grade A office space
increased by 20% this year alone (2008). The
current pipeline of projects will result in an
additional 2.7 million sq.m of office supply by
2011, resulting in a total supply of 5.5 million
sq.m. Beijing has experienced a relatively similar
pattern of growth and expansion of Grade A
office space in the last several years.
Office rentals have been impacted by the
financial crisis, as decision-making within large
corporations have slowed, with expansion and
relocation decisions delayed and temporarily
postponed. As lease transaction volume
decreased, landlords became proactive to secure
existing and new tenants. As such, landlords
have reacted positively by offering more creative
leasing structures to remain competitive. In the
first quarter of 2009 office rentals in Shanghai
fell 13.7% while rents in Beijing, Chengdu,
and Guangzhou fell by 5.4%, 11%, and 4.5%
respectively.
The prospects for the mid- to long-term for
the office sector are tied into the broader
economy. For Grade A office space, the market
is tied in large part of the demand fundamentals
around foreign investment. Per the preface, the
corporate investment drivers that underpinned
foreign investment also remain strong: low
costs; large market; and rapidly expanding
innovative resources. In the context of a global
financial crisis, where major corporation are
facing immense pressures to reduce their global
structural costs and grow revenues, while driving
innovation and shortening product life cycles, the
China market bodes quite well in comparison
and contrast to many Western markets.
Although the China office market faces some
short term challenges, the mid- to long-term
growth prospects remain excellent. Shanghai
and Beijing are clearly on their way to becoming
global gateway cities to rival London or New
York, and, as such, their office markets will
increase in size. Offices are still a focus of
investors and have accounted for a high portion
of investment activity in 2008.

Purchaser Vendor Project Area Purchase Location

(Sq.M.) price
(RMB)
Asia Pacific Land Hutchison Harbour Ring Ltd The Centre 98,337 4,438 Shanghai
MGPA China Aoyuan Property Group Jinbin Dragonfly 83,195 180 Guangzhou
Building
Mapletree Motorola Motorola Tower 24,521 465 Beijing
Mountain Breeze China Central Properties Central Point 120,000 2,600 Beijing
Limited
CPIC Zhaotai Fengsheng Place 70,818 2,195 Beijing
Bank of East Asia Hongkong Luckman Capital Prosper Center 31,000 781 Beijing
Hainan Airlines China Central Properties Shengyuan Center 45,000 750 Beijing
CEIEC Zhongfang Jingmao Real Estate Power Land 42,300 800 Beijing
Development
Sky Property Management Ltd. CapitaLand Capital Tower 107,627 3,340 Beijing
SOHO China MCC Real Estate Co., Ltd. Jinhe Int'l Tower 59,950 890 Beijing

C H I N A R E PO RT | J U N E 20 0 9 9
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

Purchaser Vendor Project Area Purchase Location

(Sq.M.) price
(RMB)
Anbang Insurance Beijing Tianrun Real Estate International 54,380 1,590 Beijing
Development Co., Ltd Finance
Center(East
Tower)
Shanghai POSCO E&C Real Unknown British Fund POS Plaza 98,130 < 2,340 Shanghai
Estate Development Co., Ltd.

Source: Cushman & Wakefield Research

Office Investment Opportunities Gross Yields

We believe there are opportunities in 2009 to Beijing Shanghai

acquire completed fully leased assets in major Grade A 7%-10% 6%-9%
cities from vendors who are under pressure to
sell. In addition, there are still opportunities for Source: Cushman & Wakefield Research
specialist office developers from overseas at Gross yields are defined as rental income after deduction of management
fees, but before deduction of taxes divided by purchase price excluding
the top end of the market especially in Beijing acquisition costs.
and Shanghai. Overseas players still have some
competitive edge in terms of producing very high
specification buildings or working closely with
multinational occupiers in creating a build-to-suit
product.

Opportunities for overseas investors:

• High quality product in major cities owned by

cash strapped investors
• Premium office products in Beijing and
Shanghai
• Carefully targeted Grade A products in
secondary cities
• Tailor-made buildings for multinational
occupiers

Gross yields for office property vary from 6%

to 10% at present, with higher quality offices
which are in relatively short supply tending to
outperform in terms of rental, thus achieving
higher yields.

C H I N A R E PO RT | J U N E 20 0 9 10
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

Cushman & Wakefield is known the world-over as an in-
dustry knowledge leader. Through the delivery of timely,
accurate, high-quality research reports on the leading
trends, markets around the world and business issues of
the day, we aim to assist our clients in making property
decisions that meet their objectives and enhance their
competitive position.
In addition to producing regular reports such as global
rankings and local quarterly updates available on a
regular basis, Cushman & Wake­field also provides
customized studies to meet specific information needs
of owners, occupiers and investors.
Cushman & Wakefield is the world’s largest For additional copies of this report
privately-held commercial real estate services firm. please contact:
Founded in 1917, it has 230 offices in 58 countries
and 15,000 employees. The firm represents a www.cushmanwakefield.com
diverse customer base ranging from small businesses info@ap.cushwake.com
to Fortune 500 companies. It offers a complete
range of services within four primary disciplines:
Transaction Services, including tenant and landlord © 2009 Cushman & Wakefield, Inc.
representation in office, industrial and retail real All rights reserved.
estate; Capital Markets, including property sales, in-
vestment management, valuation services, investment
banking, debt and equity financing; Client Solutions, Asia Pacific Headquarters
including integrated real estate strategies for large 25/F The Headquarters Building,
corporations and property owners, and Consulting 168 Xizang Zhong Lu,
Services, including business and real estate consulting. Shanghai 200001
A recognized leader in global real estate research, the China
firm publishes a broad array of proprietary reports
available on its online Knowledge Center at

www.cushmanwakefield.com

This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in
this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified
such information and we do not guarantee that the information is accurate or complete.

C H I N A R E PO RT | J U N E 20 0 9 11
CHINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L C R I S I S
R E P O RT

A C & W C H I N A R E S E A R C H P U B L I C AT I O N

C H I N A R E PO RT | J U N E 20 0 9 12
C www.cushmanwakefield.com
HINA
A L A N D O F O P P O RT U N I T Y I N A G L O B A L CRISIS
R E P O RT
For industry-leading intelligence to support your real estate
and business decisions, go to Cushman & Wakefield’s
Knowledge Center at www.cushmanwakefield.com/knowledge
A C & W C H I N A R E S E A R C H P U B L I C AT I O N

©2009 Cushman & Wakefield

All Rights Reserved

C H I N A R E PO RT | J U N E 20 0 9 13