China's domestic capital dominates real estate investment market

China's domestic capital plays an increasingly important role in the country's real estate investment market, with SOEs poised to become significant sellers, a report from international real estate consultancy firm JLL showed on Wednesday.

The report highlights the record-breaking year for commercial real estate investment in China in 2015, with a total value of transacted assets reaching about 150 billion yuan ($23.8 billion), three-quarters of which were driven by domestic investment.

Supported by a range of savvy investors including private equity funds, corporate, State-owned enterprises (SOEs) and insurance firms, China's domestic investment has expanded strongly, with a compound annual growth rate of 15.4 percent over the past eight years, according to the report.

"China's real estate investment universe will continue to grow in line with its economy to accommodate changing investment appetites," said Anthony Couse, Head of Capital Markets for JLL China. "China's domestic investors are becoming increasingly sophisticated and competitive in capturing investment opportunities both domestically and globally. Foreign investors will no doubt continue to increase their footprints across China, but it will be domestic players that still provide the greatest contribution."

China's real estate market has expanded rapidly over the past several years – the total size of its institutionally invested real estate universe in 2015 was estimated to be second only to that of the US, at $806 billion – and JLL predicts that it is likely to maintain a swift pace going forward.

"At the same time," Anthony said, "we are seeing a greater diversity of domestic investors accumulating both the size and experience to build, purchase and sell real estate assets on an unprecedented scale. We expect to see 2015's record broke several times in the years ahead, with domestic capital still providing most of the momentum."

The report identifies five trends as the major forces paving the way for China's domestic investors to carry on driving investment volumes to structurally higher levels:

1. SOEs are poised to become significant sellers in the market: With future SOE reform expected to break up real estate holdings of inefficient State-owned firms, further opportunities will emerge for acquisitions and the repositioning of assets.

2. Chinese insurers are likely to emerge as some of the largest buyers domestically and globally: China's deregulation has allowed domestic insurers to become one of the most active groups of institutional players. As insurance companies grow more experienced with real estate investment, JLL anticipates their investments will expand and even accelerate in the years ahead.

3. Chinese private equity funds will expand their footprints: China's real estate private equity has the potential to develop significantly, and could even receive a boost from the activity of its domestic insurers.

4. Securitization is set to catalyze the next wave of investment activities: The Chinese government has been testing the concept of securitization through numerous pilot programs across the country for years, and the role of securitization will grow as the government improves tax and regulatory clarity.

5. Innovative methods will supplement mainstream investment channels: Applications like crowd-funding and peer-to-peer lending are just two examples of technology-enabled innovations in the real estate investment sphere. JLL expects certain technologies to be embraced even faster in China than they have been in the West.