Guest editorial

Citation

Albert Cao, J. and Wang, H. (2009), "Guest editorial", Journal of Property Investment & Finance, Vol. 27 No. 2. https://doi.org/10.1108/jpif.2009.11227baa.001

Guest editorial

Article Type: Guest editorial From: Journal of Property Investment & Finance, Volume 27, Issue 2

China has had 30 years of rapid economic growth. Its economy is to become the third largest in 2008 and will probably be the second largest in 2009. This will certainly attract interest on what China can offer in terms of business opportunities. One area where such opportunities can emerge is the development of and investment in real property.

In recent years China’s economic growth has primarily depended on domestic fixed asset investment, in particular in property development and infrastructure construction. A huge amount of new residential and commercial property is created every year and made available for investment. A nation-wide property investment market for domestic investors has formed. In the past several years international property investors were found to be active in tier I cities such as Shanghai and Beijing, as well as in tier II and tier III cities.

Nevertheless, most domestic and international investors face high information costs in understanding the market and appraising opportunities. One obvious reason is that the property market in China has only a short history and is thus far from mature. A further complication is that the property sector has been used as a pillar industry to promote economic growth, which brings substantial intervention from the state at both the central and local levels. In particular, the widely adopted property-led urban economic growth model, as elaborated by Cao, creates many otherwise irrational development decisions. To understand the resultant dynamism in the market requires knowledge from careful observation and informed interpretation of the market and its regulation. Such knowledge is currently small in stock and under-supplied both academically and commercially in contrast to the ever-expanding size of property stock and market transactions.

This special issue of the Journal of Property Investment & Finance therefore tries to contribute to filling in the knowledge gap. The papers included represent a snapshot of research being conducted in this burgeoning field of enquiry by authors both inside and outside China.

The first paper by Newell et al. examines the performance and dynamics of the China commercial property market and the value of Chinese commercial property in pan-Asian portfolios. It concludes that China’s commercial property has shown significantly enhanced performance and diversification benefits in recent years and provides clear diversification benefits in a pan-Asia property fund context. The paper is a valuable addition to the limited empirical research on Chinese commercial property.

Ke and White’s paper provides a more detailed analysis by using econometric modeling techniques to investigate office rent determination in the CDB of Shanghai, the most mature market in China. It finds that gross domestic product (GDP) and office stock significantly affect office rental performance in the Shanghai market in the long run and a logical market adjustment process is in operation in this emerging market. The paper also points out the need for caution in interpreting the results of a study set in an immature market with heavy government intervention.

Wang et al. undertake a qualitative study of a future Chinese real estate investment trusts (REITs) market in the context of China’s idiosyncratic economic, regulatory, and legal development. Their paper finds that China’s nascent real estate market would especially benefit from REITs, since this would provide alternatives to commercial bank financing, improve building maintenance, and offer needed viable exit strategies to property owners and private equity firms. The paper also goes on to offer specific practical advice on how to launch China REITs. In keeping with China’s traditional preference for incremental reform over sudden change, it suggests a possible initial deployment of “pilot REITs.” A fully-formed, more-established REITs market will require the passage of formal legislation, drawing on international experience. In addition, Wang et al. furnish advice on how China REITs should look structurally and how they should be run in practice.

To explain the impact of the state on market investment risks, Cao’s paper supports the claim that the Chinese state is polymorphous rather than developmental. Using fieldwork results, the paper illustrates both the weakness of the central government when it comes to implementing national policies on the property market, and the relative autonomy of local governments in market intervention. He shows that risks in property investment are heightened by poor planning and implementation of urban development, intensive competition among projects, and poor data services and legal support for market operations. Cao’s paper provides key qualitative insights into real estate investment risks peculiar to China.

The other paper by Newell et al. is the first trenchant analysis of the significance and performance of infrastructure in China. It presents a risk-adjusted analysis of Chinese infrastructure companies listed on the Hong Kong stock exchange and goes on to assess performance and diversification benefits of Chinese infrastructure. The paper finds improving risk-adjusted returns but recent loss of diversification benefits in Chinese infrastructure, as well as a strong link between effective infrastructure and commercial property markets. The paper offers valuable and original insight to potential investors in China.

This special issue of the Journal of Property Investment & Finance thus provides a wealth of useful information to anyone interested in Chinese real estate. It features papers on Chinese commercial property, Shanghai CBD office rent, a look into the future of China REITs, an analysis of special risks associated with China, and a rigorous study of Chinese infrastructure. These papers taken together comprise a highly compelling and original set of studies on Chinese real estate. As such, they will be essential to academics and policy makers, as well as to investors looking for an information advantage when considering investment in Chinese real estate.

J. Albert Cao, Hong Wang