With Chinese authorities cracking down on big tech to curb their cultural and economic power, institutional investors are looking at other sectors of the country’s economy for long-term yield.

Real estate could win increased support from state-owned investors (SOIs) with Dutch public pension fund manager APG indicating it was ramping up its investment in rental housing. Graeme Torre, managing director of APG Asset Management, told Reuters that it would commit around EUR1 billion (US$1.2 billion) into Chinese rental housing over the next three to five years.

Alluding to the financial fall-out from regulators’ assault on monopolistic practices in the tech sector and the clamp-down on edtech, he said: “We like to invest with policy rather than trying to avoid it or invest against it. So I'd like to think it's politically correct.”

An improving macroeconomic environment as the pandemic recedes should see strong growth in Chinese construction activity. Yet, the residential sector is an already saturated market, not helped by declining population growth and a projected fall in the number of first-time home buyers after 2030.

Nevertheless, residential building will be supported by government efforts to reach the target of a 65% urban population in 2025 under the 14th Five-Year Plan. To assist this, the government is changing the Hukou household registration system to allow people from rural areas to become permanent residents in cities, which should boost housing demand in Tier 1 and 2 urban areas, driving new residential building development. The rental sector is likely to be a major beneficiary of growing demand. At the same time, the 14FYP is stressing greater environmental sustainability, which indicates residential developments will need to be sensitive to issues such as carbon emissions and energy consumption.

The government is also generating interest in residential housing with tax breaks for operators taking effect this October, and the launch of a market for real estate investment trusts in June. Goldman Sachs forecasts that China's REIT market could reach US$3 trillion if the authorities widen the program from infrastructure, logistics and industrial real estate to include traditional real estate assets, including residential developments.

APG is one of the leading SOIs in Chinese real estate. Investment from 2010 has been led by ADIA, representing 29% of the US$25.6 billion in capital deployed by foreign SOIs, followed by GIC (25%), CPP Investments (25%), and APG (12%).

However, residential property has not to date been a top priority with SOIs backing developed markets over emerging markets in the segment. In terms of segment, logistics property has been an overwhelming favorite, representing 39% of the total, followed by offices (23%), mixed developments (17%), residential (11%), and retail (8%). ADIA has focused mostly on logistics, while offices are GIC’s top target, and CPP has a broad exposure across all sectors.

APG has formed partnerships in Chinese real estate. In 2015 it joined CDPQ's Ivanhoé Cambridge in backing developer Chongbang Group's US$920 million funding round and also supported a US$550 million China-focused rental housing fund established by Greystar in 2019.

While APG is making a strong penetration into the rental housing sector, Global SWF expects continuing interest in logistics which was spurred by the pandemic. Demand for premium warehousing is set to soar, particularly in cold chain logistics due to growth in e-commerce in fresh food. E-commerce demand will also grow in smaller cities, opening the potential for warehousing in lower tier cities. As such, SOIs could be looking to logistics joint venture partners as well as funds for further exposure to the segment.

Across Asia, regional logistics platform ESR has forged a number of partnerships to invest in the segment, particularly with CPP Investments and APG in South Korea. LOGOS has also forged deals with CPP Investments for Indonesia and Singapore. We expect to see similar deals in China, funnelling billions of SOI capital into China’s logistics real estate.

The likely growth in SOI investment in Chinese real estate should boost hiring at offices in the country, which currently lack significant specialism in the sector. While they may have seen little need for personnel so long as they worked in partnership with GPs, expansion in the Chinese real estate sector should prompt expansion of in-house capacities to bolster origination capabilities.

Related funds ADIA APG CPP GIC