Realty still hot for long-term players

With uncertain winds blowing across the property sector, there is also apprehension among several foreign investors on whether they should continue to stay invested in the realty sector or to exit it totally.

In my opinion, there is no need for foreign investors to consider getting out. Rather it would be better if they can adopt the right strategy that will still give them good returns on their investment. Since most of the tightening policies are targeted at residential property purchases, the commercial property sector, including retail and office spaces, are less likely to be affected by the new regulations.

Shanghai is an ideal example of a region where commercial realty prices have risen sharply. Growing demand and limited availability have increased the monthly average net effective rental rates for Grade A offices to 391 yuan (42 euros) per square meter during the second quarter of this year, an increase of 7.7 percent quarter-on-quarter, according to Cushman & Wakefield, a US-based property consultant.

Vacancy rates of retail property in Shanghai's major shopping areas were at a low of 4.4 percent during the second quarter, while net effective rental rate rose to 1,821 yuan per square meter per month, climbing 0.28 percent quarter-on-quarter.

In Beijing, the monthly rental rate for Grade A offices jumped 13.6 percent quarter-on-quarter to 366 yuan per square meter.

All of these trends indicate that the commercial property sector is still hot and capable of offering healthy returns on investment.

Despite the property market tightening, affordable housing is one segment that will still gain, thanks to the strong government backing.

As a crucial and important measure to prop up the real estate market, the central government has called for construction of more affordable homes for low-income groups. It plans to spend 1.4 trillion yuan to build 10 million such homes this year. However, only 30 percent of these homes were built or were being built in the first five months of the year, which means that 930 billion yuan will be invested in the second half of the year.

Although the profit margin is lower than other types of residential areas, affordable housing offers stable returns and carry little risk due to the strong governmental support.

Foreign investors can form joint ventures with, or lend to, local players, who are facing an acute shortage of capital due to the tightening measures. With most of the Chinese property developers keen to stay afloat, there will be many opportunities for foreign investors who are willing to invest with a long-term view.

The liquidity crunch will force many Chinese developers to let go of their bargaining powers at the negotiating table. So it is the right time for foreign investors to start pursuing the right targets. Cash-strapped local developers, who were once reluctant to share their profits with foreign players, will also be keen on getting external funding.

But while selecting the potential partner or acquisition target, foreign investors should carefully weigh the size of the land reserves of Chinese counterparts before taking investment decisions. Land is the lifeline of the industry and hence not reproducible.

The author is an independent economics commentator.

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