前言：
近期，高和资本合伙人周以升接受PERE采访，就疫情的影响和写字楼、零售业的应对，以及针对未来的发展如何做好自我定位等相关问题进行了解答，并就即将推出的中国房地产投资信托基金提出想法。发表在PERE 2021年5月3日刊，以下是报道内容。
K E Y N O T E I N T E R V I E W
Post-pandemic optimism
PERE • May 2021
While other regional markets continue waging the covid battle, China has won its fight and for real estate investors, there is much to be confident about going forward, says GoHigh Capital’s Josh Zhou
The covid-19 pandemic brought an immediate halt to much of life and business in China last year, while also throwing the business models of many real estate owners into confusion. However, after a very strict lockdown in the first quarter of 2020, China emerged relatively quickly from the pandemic and consumers returned to shopping centers and workers to their offices.
Josh Zhou, executive partner of Chinese investment manager GoHigh Capital, speaks to PERE’s Mark Cooper about the impact of the pandemic, how the office and retail sectors have reacted to it and how real estate investment managers should position themselves for future growth, and proffers some thoughts on the imminent launch of REITs this year.
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Q
How did covid-19 impact China real estate and what changes did it bring?
The pandemic caused a lot of stress to the cashflows of asset owners in the short term, because offices and most retail remained closed for a number of weeks. This put a lot of businesses under pressure. To add to this, the Chinese government remains concerned about the cost of housing and, despite the pandemic, prices rose in many markets in 2020.
So, in late 2020 there were government initiatives to reduce leverage in the real estate sector in order to rein in that residential price growth. There are now ‘three red lines,’ which restrict the amount that developers can borrow in relation to their asset value, cash holdings and equity levels. This has led to many trapped or distressed assets around the country because developers are restricted from borrowing and banks are forced to restrict lending. The commercial real estate market overall has been somewhat subdued. However, there have been pockets of resilience for certain office districts in Shanghai and Beijing, as well as community shopping centers.
On the positive side, China GDP growth held up remarkably well in 2020 and began to bounce back very strongly last year and will continue to do so this year. There’s confidence here, which stems from the observation that the Chinese government handled the pandemic well. We also see further positive development for real estate, with initiatives such as the China real estate investment trusts, the first of which will be launched later this year.
Rong Center, Beijing : proving that there is demand for office space post-covid
Q
Has the pandemic changed how China’s office markets operate? For example, will we see more working from home?
We still don’t have the data to show how much working from home has become prevalent in China. In the first quarter of 2020, when the pandemic hit hard, working from home prevailed for a while. Yet the trend quickly subsided when covid got under control. Workers resumed going back to office to be able to communicate and collaborate more effectively.
Moreover, in the state-owned enterprises or government departments there’s a culture of staff having to be in the office for supervision and the pandemic has not changed that.
For private companies, in the IT sector for example, which is the major occupier of office space, we may see more working from home in future. However, even in this sector, I don’t think working from home will be a significant long-term trend. The growth of these companies is based on collaboration and innovation, and this means they need shared space to generate ideas.
Certainly, at the moment, we don’t see a working from home trend stopping China’s IT companies from investing in new office space. For example, in 2019 we bought a shopping mall in Beijing called Aegean Square and converted it to a 100,000 square meters (1,076,391 square foot) Grade A office, which is now called Rong Center. We saw a lot of interest from tech companies and some well-known names have recently took a master lease for the whole building, which demonstrates that there’s continued strong demand from tenants in the IT and related industries.
Q
How has retail been affected by the pandemic?
Retail was very difficult in the short term, due to the drop in cashflow from tenants that could not open and because of restrictions on finance. However, asset owners that were able to get through the difficult times are more optimistic for the future.
We see a lot of pessimism in the US and Europe about the prospects for retail, because of the acceleration of online shopping. However, in China we’re more confident about the immediate and long term, because we have absorbed the impact of online retail over the past five or 10 years, and the Chinese retail real estate market has been developing alongside e-commerce. Shopping mall operators have adjusted their tenant mix to deal with the impact of online, so well-located and managed retail should thrive.
Also, since the pandemic was controlled and retail reopened, Chinese shoppers have been back in the malls in great numbers. For example, we have an asset under management, a shopping mall project in Beijing’s Daxing District, called Joy Breeze. It’s a 150,000 square meter shopping mall, where we completed the leasing during the pandemic and opened over Christmas. More than half the mall’s gross floor area is leased to F&B or experiential retail tenants – the segments which have been resilient to the online shopping trend.
Despite much of the leasing work being undertaken during the pandemic, the average rents secured were 10 percent higher than our underwriting. On the fi rst day of opening, it attracted 150,000 visitors and averaged 30,000 a day afterwards, which shows that Chinese consumption is still very strong.
“There’s confidence here, which stems from the observation that the Chinese government handled the pandemic well”
The pandemic has also created an opportunity in retail. During the pandemic, we observed that asset price adjustments were much higher than the operating cashflow adjustments, which generated a lot of opportunities. You can buy assets at discount, especially if the owner has difficulty with financing, and then benefit from the economic recovery in the medium to longer term.
Q
How difficult is the financing environment?
The financing environment is particularly tough in China’s residential market because the government is trying to restrict loans into the sector, which has an effect on developers more generally if they own assets in other sectors. There is a mismatch between demand and supply of bank finance. However, well-funded investment managers with good banking relationships can still borrow from the banks. For example, GoHigh Capital was able to secure approximately 7 billion yuan ($1.1 billion; €0.9 billion) of bank loans for our projects. Banks need to have confidence in your asset management capability and want to see an exit strategy.
Q
What are the lessons from the pandemic? And how can asset owners thrive during and after such upheaval?
This is the question we always ask ourselves: How can we make our business more resilient to future events, whatever they may be? As an independent manager, without state-owned enterprise or financial institution backing, we have to find and develop core competencies which differentiate us.
At GoHigh Capital, we’ve developed our business to be able to take on complicated or distressed investment projects and also large-scale projects. There’s a lot more competition for smaller or less difficult assets. To take on large and complicated projects, you need to build a strong asset management team that can restructure leases, to clear out existing tenants and to repurpose or reposition the assets. You need to have in-house tax and legal capabilities to deal with these complexities and, of course, you need the transaction and deal-sourcing capabilities to gain access to these deals in the first place.
I believe it’s important to be able to source off-market transactions in China and for this you need to be deeply rooted in the markets where you operate and to know who the sellers or potential sellers are and what they need from a transaction. If you invest in these capabilities to take on these difficult transactions, it means you can buy cheap and that is the first stage to securing a good return. These capabilities also mean you can then add value over the life of the investment.
“C-REITs will provide a benchmark for pricing and an exit option for investors”
The REIT route
China REITs are set to be launched this year. Josh Zhou
“The launch of the C-REIT is very important for the whole real estate industry and I believe it will lead to repricing of the real estate sector over time. I’ve been working with the regulatory authorities as part of its expert panel on REITs and GoHigh’s investment banking division is an advisor to one of the first REITs, which is set to go public later this year. At present, C-REITs are limited to infrastructure projects, however these are deemed to include data centers, logistics warehouses and industrial parks, so are already open to some income-generating properties.
“Furthermore, I believe the scope of C-REITs will be expanded to other sectors within five years or so and that this will be of huge benefit to commercial real estate owners and generate many opportunities. One of the barriers to both domestic and foreign investors to buying China commercial real estate is concern about the eventual exit, especially with regard to retail real estate. However, C-REITs will provide a benchmark for pricing and an exit option for investors, and this will generate a lot of confidence. We think it will lead to a repricing for the whole commercial real estate sector.
“GoHigh Capital’s proprietary knowledge of REITs will give us advantage as an asset manager both in deal sourcing and exit.”
