China's real estate sector has become a powerful symbol of the country's rapidly overheating economy and a target for government efforts to put out the fires. After property developers increased investment in construction projects 20% year-on-year in the first quarter, even as unsold real estate climbed by almost 24%, the government struck back with a series of measures designed to derail property speculation. Foreign investors were singled out for special attention. Jones Lang LaSalle Asia Pacific CEO Peter Barge tells CHINA ECONOMIC REVIEW that the regulations will have an impact, but market forces will ensure China continues to be the world's hottest market.
Q: How important is China to Jones Lang LaSalle's global operations?
A: It's been our fastest-growing market in the world for a couple of years – it sits up there with India and Russia. We get somewhere between 30% and 60% growth a year out of those three markets but China has been the highest on average over the last three or four years. Last year was near on 40% and this year we're going to have a particularly good year – we've opened a lot of new frontiers.
Q: Why is China so attractive?
A: The thing we like about it as a country is that we have growth opportunities in every sector in which we operate and that is not true of any other country in the world. Of all the countries we operate in – and I would include Russia and India in this – there are sectors that have more growth potential than others. But here in the industrial business, the hotel business, the retail business, there is a tonne of potential. It's more often an issue in China of where do you put your investment dollars rather than which sectors should you be in.
Q: Where is Jones Lang LaSalle concentrating its efforts?
A: We are currently operating in about 18 cities around China but the profile of our business is different in different cities, based on where we are in the [supply and demand] cycle and where we think it's going to go. We've got a big focus over the next 12 months on Chengdu and Tianjin, but then we've also got a lot of Japanese clients who are very much focused on Dalian. We've got a very large Japanese business. Meanwhile, the hotel people are very much focused on internal tourism in China, and then the technology companies like Microsoft, Accenture and IBM have all got different strategies for the country. We are working for a number of international banks that are doing branch roll-outs right across the country. Some of them have different strategies and are putting branches in the cities that others aren't looking at. Some of them have gone for very much a second- and third-tier strategy while some have gone for just a second-tier strategy. It is varying incredibly depending on the client set. It's the same with investors. The opportunity funds are probably getting much more aggressive in the second- and third-tier cities now whereas the more traditional funds, that don't have such a great risk horizon, are still very much focused on Beijing, Shanghai and Guangzhou.
Q: Fears are growing that a property bubble is forming. Are these fears justified?
A: Nobody has seen the growth that we are seeing here and nobody knows the answer so you do have outside influences impacting the market – government regulations, a whole range of things. It affects supply and demand, but in the end it is all about supply and demand. People won't build things that they cannot sell. No one will lend money to people they can't get a return on. These are basic things that apply in any market. You can muck around with it and you can delay it and you can hold it off but in the end everything comes back to equilibrium. Gravity works everywhere. I have been doing this for 35 years and whenever I go into a market and people tell me why gravity doesn't apply in that market, they are always proved wrong. Maybe not that year, maybe not the next year, maybe not in three years – but they are always proved wrong. There is an equilibrium to which markets always return.
Q: Will that equilibrium come via a hard or a soft landing?
A: I was addressing half a dozen of the biggest real estate players in the world in New York [in August] and the consensus of the discussion that we had about whether there was going to be a hard or a soft landing was that there hasn't been [a landing]. There has been some adjustment but there is no evidence of a bubble. A bubble infers that there is a crash coming, but the regulations [introduced this year] are having an impact. There are three series of regulations that have come in now and after each of them there has been an adjustment. I think the government is getting better at rifling the changes they need.
Q: The government is in part blaming foreign investment for the hot property sector. Is it justified?
A: Only part of the regulations released in May, June and July have focused on foreign investors. Requiring them to have onshore entities isn't a big deal; the majority of the entities set up to do foreign deals were onshore anyway. The requirement to have 50% registered capital is another one, which impacts very much on the first deal an entity does but has less impact going forward. The third one, which is even less significant, is the restriction on foreigners buying apartments unless they have been here 12 months and unless they are going to live in it. Only 5% of the units in Shanghai by value are sold to foreigners so I don't see that having a big impact. The other regulations are going to have the bigger impact than those specifically affecting foreigners.
Q: So why is the government targeting foreign investment?
A: I think there was a need for the government to be seen to be regulating foreign investment because the perception was it was having a bigger impact on the market than it was in reality. So from the point of being seen to address an issue, they have taken action, but I think the big impact will come from the non-international regulations. Look, [regulations on foreigners] will have an impact; it's just not massively significant. We are sitting down with all our clients now and going through it. I think the biggest issue is how these regulations are going to be interpreted and whether they are going to be consistently interpreted across all cities or whether some cities will read it one way and other cities another way.
Q: Are these regional variations in interpretation a risk?
A: I think it is one of the biggest issues. There is a two-stage process. The first stage is that regulations come out and we read the written word and we sit down with our clients and say what this is going to mean. Then you have to wait for the second part of the equation, which is how are they going to be interpreted. This is something that is reasonably unique to China in that the regulation and its interpretation can be two different things in two different cities whereas in a lot of countries around the world a regulation comes out and that is how it is interpreted, right across the country. In Shanghai, we are still waiting to see how a number of these regulations are going to be interpreted. In Beijing we've already got an idea of how they are going to interpret some of them.
Q: Does the use of regulations rather than interest rates add to the difficulties?
A: The industry hasn't used interest rates as a regulator of the market as it has used them all around the world. They tend to use regulations more. Developers can understand the movement of interest rates globally and the differential between borrowing rates and their yields but where it is controlled by regulations it makes it a little bit harder. Interest rates have the ability to self-regulate an industry whereas if you are using regulations you often have to have a whole range of them impacting supply and demand in various sectors. It is a bit more complicated than using a combination of regulations and interest rates.
Q: Geographically, where are the best opportunities in China?
A: It depends on who you are. Our clients range from retailers who come here to do the retail business to hotel chains who come here to open hotels to investors who buy into our funds. And even then you have opportunity funds, growth funds, core funds – and they all have different perspectives on where is a good place to invest for them. So the answer is it's different for everybody. The good thing about China is that it's not like Singapore where you have one city with one set of rules and one set of economic dynamics. Either I like the profile that Singapore is presenting in my particular sector, whether it's hotels or retail or industrial, or I don't. In China you can come up with different answers for different cities. That is where China is different – in most places you make a country decision and the city has a lesser impact.