Hu Feng: I look forward to clear and reasonable policies and systems in the future to help the smooth progress of urban renewal

Hu Feng, General Manager of Cushman & Wakefield Beijing

China Housing Daily reporter Tian Aoyun reported from Beijing

On April 27, the "2024 China Urban Renewal Innovation and Development Summit Forum" with the theme of "More Future: New Qualitative Power in Urban Renewal" was held in Beijing, and the event was jointly sponsored by China Real Estate News and China Institute of Urban and Regional Governance. At the meeting, Hu Feng, general manager of Cushman & Wakefield Beijing, delivered a keynote speech on "Investment, Financing, Management and Withdrawal - Opening up the Full Closed Loop of Urban Renewal".

In his speech, Hu Feng analyzed the performance of the office market and the commercial market in the process of urban renewal in recent years from the market dimension, and introduced the hot issues that the industry is generally concerned about in the process of urban renewal, including the long-term impact of land renewal on the value of property assets, and deeply analyzed how this factor acts on the dynamic balance of the property investment market. At the same time, he also discussed the latest development of public REITs in building a closed loop of asset operation, investment, financing, management and withdrawal.

"Beijing excels in the national office market"

When looking at the office market in the fourth quarter of 2023, Beijing remains in the national spotlight.

"From this chart, we can clearly see that the horizontal axis represents the vacancy rate, while the vertical axis shows the monthly rent per square meter. Compared to other cities, Beijing performs better in indicators, with a lower vacancy rate than other cities and the highest rents in the country. Hu Feng said.

Turning to the stock data of first-tier cities, we can see that Shanghai's Grade A office stock has reached a staggering 16 million square meters, while Beijing is close behind with 13 million square meters.

In terms of vacancy rates last year, Beijing's vacancy rate was 18.7% in the fourth quarter, compared to 21.8% in Shanghai, 18% in Guangzhou, and slightly higher in Shenzhen.

Hu Feng said that during the financial crisis in 2008 and 2009, the vacancy rate of Grade A office buildings in Beijing climbed to a high of 20%. As developers scaled back office development, especially during the 2008 Olympic Games, construction became more difficult and supply was further reduced. However, with the rapid recovery of the economy after the investment of 4 trillion yuan, the demand increased, and the vacancy rate fell to a record low of about 3% in 2011.

At present, affected by the market recession and economic downturn, lease renewal has become the preferred strategy for many enterprises. According to statistics, the renewal area has accounted for 36% of the total leasing area, of which TMT, financial and professional services have become the main force in the leasing market.

In addition, in recent years, it is not uncommon for office projects to enter the market through urban renewal, such as Dinghao Mall, Zhongrong Trust Building and Aegean Commercial Renovation Project. These projects not only enhance the overall image of the city, but also inject new vitality into the office market.

"According to statistics, urban renewal projects accounted for 25% of the office buildings that have entered the city from 2016 to 2023, and urban renewal projects will play an increasingly important role in them," Hu Feng said.

In terms of rent, although Beijing ranks first among the four cities with a monthly rent of about 10 yuan per square meter, this price is still very reasonable considering its market positioning and development potential. Rents in Shanghai, Guangzhou and Shenzhen reached RMB239, RMB149 and RMB186 per month, respectively.

"Overall, Beijing has performed better in the national office market, both in terms of vacancy rates and rents. Hu Feng emphasized.

The retail market is showing a unique development, especially in terms of commercial renewal.

From 2016 to 2023, the new area will be as high as 2 million square meters, of which the renovation projects in administrative areas such as Changping and Haidian account for more than 50%, and community commercial projects are particularly common.

In the field of block transactions, the transaction value in Beijing in 2023 has nearly doubled compared to 2022, with a total of 59 transactions in the year, setting a new high in the past five years. Despite the relatively small size of a single transaction, large transactions still maintain a certain level of activity.

In terms of transaction formats, office buildings and business parks account for more than 40% of the total, and with the continuous development of the REITs market, transactions in industrial logistics and retail formats are also gradually increasing. Retail, in particular, has fluctuated between 11% and 20% in previous years, while the proportion of apartments has been steadily increasing.

Among the large transaction projects, there are not a few projects involving renovation. In the case of Suning Life Plaza, which was transacted last year, this type of project is active in the bulk market, reflecting the demand for a large number of properties in Beijing in the process of urban renewal.

The impact of the age of the land on the value of the property

However, with the development of urban renewal and large transactions, the issue of land renewal has gradually surfaced. The 40-year tenure of commercial land is now about 20 years old for projects in 2003 and 2004, raising a number of questions about property lending and valuation. For example, the property loan regulations have restrictions on loan tenors of more than 10 years or a maximum of 15 years, and the loan maturity date should be at least 5 years earlier than the maturity date of the property title certificate of the loaned property, which makes it more difficult for properties with shorter land tenure to obtain financing.

In terms of valuation, commercial properties are usually valued using the income method, where age has a particularly significant impact on valuation. Generally speaking, the valuation of a property after more than 25 years of life will be less affected, while the valuation of a property less than 20 years old will be more affected. When it comes to block trades, investors are concerned that assets with a shorter useful life will be difficult to sell in the future, which will affect their investment returns. "In addition, for investors looking to invest in urban renewal projects and achieve better returns, the uncertainty of land renewal fees and the uncertainty of payment methods also add to their investment concerns. Hu Feng added.

Therefore, in terms of land renewal, how to determine the renewal fee, payment method and the protection of rights and interests after renewal have become the focus of investors' attention.

Hong Kong has some experience in land renewal for reference, Hong Kong returned to the motherland with 50 years of land use rights, and now there are only more than 20 years left, Hong Kong adopts the annual payment of 3% of the rateable rent of the land, which not only avoids the pressure of investors to pay a large amount of money at one time, but also ensures that the government can share the corresponding tax income when the property assets are valued.

For Beijing, although the Beijing Urban Renewal Regulations mention land renewal, the specific policies and systems still need to be further improved.

"Under the pressure of funding and unclear policies, many projects are facing difficulties in land renewal. Hu Feng said that he looks forward to the introduction of more clear and reasonable policies and systems in the future to promote the smooth progress of urban renewal.

There is a lot of potential development space in the public REITs market

Hu Feng believes that C-REITs (real estate investment trusts) are important financial instruments in the real estate investment and financing system. In 2021, the successful launch of China's first infrastructure REITs product marked a new milestone in this field.

Horizontal analogy with the international market, the current REITs in the United States and Japan are relatively mature, and the market value of REITs accounts for 2%~3% of the entire stock market value, while Chinese mainland REITs account for only 0.1% of the stock market value. Referring to international experience, taking the market value of A-share stocks of 80 trillion ~ 90 trillion yuan as an example, if it is at the level of 2%, it can reach the level of about 2 trillion yuan, and the scale and proportion of China's REITs market still have a lot of room for growth.

Once the REITs market matures further, the closed loop of investment, financing, management and withdrawal will be opened, providing investors with more flexible and efficient investment channels, and at the same time, it will also promote the refined operation and management of the commercial real estate market.

C-REITs mainly include real estate and fee income rights. At present, REITs have been successfully issued in warehousing and logistics, industrial plants, industrial parks, rental housing and consumption projects.

Generally speaking, the successful issuance of REITs requires a series of conditions, such as the project operation time is not less than three years in principle, the initial offering scale reaches a certain level of not less than 1 billion yuan, and the income distribution ratio is not less than 90% of the fund's annual distributable profit.

The evaluation of asset value is an important issue for the value of the project after urban renewal.

Typically, investors use the discounted cash flow (DCF) method of the income approach as the primary pricing method. The bulk trading market in Chinese mainland is small at about 300 billion yuan per year, mainly concentrated in first-tier cities, and the market in second- and third-tier cities is relatively deserted, so it is difficult to use the market comparison method to evaluate cases. In the income approach, the DCF valuation method is an important tool, which mainly focuses on factors such as land age, existing rental level, rental growth rate, and maintenance costs and operating expenses, and calculates the value of assets through an appropriate discount rate.

At present, the successful issuance of consumer REITs projects includes China Resources REIT, Jinmao REIT and Wumart REIT, and will soon issue SCPI REIT, which not only proves the vitality of the REITs market, but also lays the foundation for the issuance of more projects in the future.

"With the gradual maturity of the REITs market and the development of private equity funds, the commercial real estate market will usher in broader development prospects. Hu Feng said.