The significance of Chinese commercial property in an Asian property portfolio
| Pages | 102-119 |
| DOI | https://doi.org/10.1108/14635780910937827 |
| Date | 06 March 2009 |
| Published date | 06 March 2009 |
| Author | Graeme Newell,Kwong Wing Chau,Siu Kei Wong |
| Subject Matter | Property management & built environment |
The significance of Chinese
commercial property in an Asian
property portfolio
Graeme Newell
University of Western Sydney, Penrith South, Australia, and
Kwong Wing Chau and Siu Kei Wong
University of Hong Kong, Hong Kong
Abstract
Purpose – International investors have shown considerable recent interest regarding property
investment in China via both direct and indirect property. The purpose of this paper is to assess the
significance and performance of the China commercial property market compared to six developed and
emerging commercial property markets in Asia.
Design/methodology/approach – This paper analyses the performance of commercial property in
China over 1998-2007 for both direct and indirect property. Risk-adjusted performance analysis is used
to assess the added value of China commercial property in a pan-Asia portfolio, with the portfolio
diversification benefits of China commercial property also assessed. Sub-period analyses are also used
to assess the dynamics of China commercial property.
Findings – This paper finds that China commercial property has shown significantly enhanced
performance and diversification benefits in recent years. In a pan-Asia property fund context, there are
clear diversification benefits provided by China commercial property, with these benefits also being
evident in the other Asian property markets. The findings highlight the benefits of a pan-Asia
property investment strategy by international property investors, as well as the key benefits and
added-value of including China commercial property in this pan-Asia property investment strategy.
Originality/value – Previous empirical research into the China commercial property markets has
been very limited. This paper rigorously assesses the role of China commercial property in a pan-Asia
property portfolio context. Given the increasing interest by the leading international property
investors regarding investing in China commercial property, this research enables more informed and
practical investment decision-making regarding the role of both direct and indirect China commercial
property as part of a pan-Asia institutional property investment strategy.
Keywords China, Organizations,Property, Portfolio investment,International organizations,Investors
Paper type Research paper
Introduction
With investors having an increased appetite for property in recent years (Talbot, 2007),
this has resulted in significant growth in assets under management for the major
property fund managers and global property securities funds. These significant capital
inflows and increased competition for property assets have seen yield compression in
the major mature property markets in 2005-2007, with a resulting increased focus on
the potential strategic role for international property investment. Major factors also
contributing to this increased international property exposure have included the need
for portfolio diversification, potential for higher returns, lower cost of capital and
favourable exchange rates (Murdoch, 2004; Worzala and Newell, 1998). Recent studies
have also highlighted the portfolio diversification benefits of international direct and
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JPIF
27,2
102
Journal of Property Investment &
Finance
Vol. 27 No. 2, 2009
pp. 102-119
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780910937827
indirect property in a mixed-asset portfolio (e.g. Bond et al., 2003; Conover et al., 2002;
Hoesli et al., 2004; Ling and Naranjo, 2002), with several studies specifically
highlighting the effectiveness of international diversification into the Asian property
markets (e.g. Addae-Dapaah and Loh, 2005; Bond et al., 2003; Garvey et al., 2001).
This increased appetite for international property investment is shown in the global
commercial property transaction capital flows in 2006 (JLL, 2007a). Of the $682 billion
in global commercial property transactions in 2006, 42 per cent were cross-border, with
29 per cent being cross-continent. Importantly, 33 per cent of commercial property
transaction capital flows in Asia in 2006 ($27 billion) were cross-border; this being an
increase of 77 per cent on the 2005 level of $15.3 billion. Table I sees China as the
second largest Asian country for commercial property transaction capital flows in
2006, accounting for 11 per cent of transactions; only exceeded by Japan. For China, 61
per cent of these transactions were cross-border, significantly above the levels of
cross-border transactions seen in all other Asian countries and globally (JLL, 2007a).
This reflects the significant commercial property investment in China in recent years
by major international investors, including Morgan Stanley, ING, Goldman Sachs,
Lehman Brothers, RREEF, GIC, CapitaLand and Macquarie (JLL, 2007b; Lau, 2007;
RREEF, 2007).
Given this significant international property investor interest in China, detailed
empirical research regarding the dynamics of the China commercial property markets
is still very limited, with only Cao and Keivani (2007) and Newell et al. (2005)
examining these property markets in detail. As such, the purpose of this paper is to
assess the significance and performance of the China commercial property market
compared to the other developed and emerging property markets in Asia. In particular,
the performance of office and retail property and property companies in China will be
assessed over Q4: 1998-Q1: 2007 and contrasted to the performance of other Asian
property markets, including Hong Kong, Singapore, Thailand, Indonesia, Malaysia
and Philippines. The risk-adjusted performance and portfolio diversification benefits
of China commercial property will be assessed in an Asian property portfolio context;
particularly whether these benefits have been enhanced in more recent years. The
implications for including China commercial property in a pan-Asia property portfolio
by major international investors will also be assessed.
Transaction value Transaction
Country ($ billion) (%)
Japan 52 64
China 9 11
Hong Kong 7 9
Singapore 5 6
Taiwan 2.5 3
Malaysia 2.5 3
Korea 2 2
Thailand 1 1
Other ,1,1
Total 81 100
Source: JLL (2007a)
Table I.
Asia commercial
property transaction
capital flows: 2006
Chinese
commercial
property
103
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