The rise of REITs leads to a general increase in the capitalization rate of real estate in 2024.

On October 17, Cushman & Wakefield released the fifth issue of the "China REITs Index: Research Report on Real Estate Capitalization Rates". The report indicates that among all asset types, long-term rental apartments/service apartments are the most favored by investors, followed by shopping centers and business parks, while the investment interest in Grade A office buildings has decreased. From a city perspective, Beijing and Shanghai have the highest proportion of assets that draw investor attention, reflecting the market's investment preference for these two cities.

Chen Jiahui, Head of Valuation and Advisory Services Department, Greater China, and Managing Director of Cushman & Wakefield, stated that the release of Document No. 1014 marks the normalization of the issuance of infrastructure public offering REITs, and the role of the REITs market in price discovery and value guidance in large-scale real estate transactions is becoming increasingly prominent. Cushman & Wakefield released the research results of the 2024 real estate capitalization rate survey to provide a solid "anchor" for asset pricing for the sustainable development of the real estate and REITs markets.

Investors Focus on First-tier Cities and Surrounding Areas, and Industry Stability Drives Investment Trends

The proportion of assets in Beijing and Shanghai that attract investor attention is the highest, reflecting the market's investment preference for these two cities; non-first-tier cities are gradually becoming a new focus for investors due to their rapid economic development and relatively high investment returns. The top 5 cities or regions with the highest attention are Hangzhou, Chengdu, Suzhou, the Greater Bay Area (excluding Guangzhou and Shenzhen), and Nanjing.

Top 8 cities with non-first-tier cities' investment opportunities attention, Data source: Cushman & Wakefield

 Long-Term Rental Apartments/Service Apartments Favored by Investors, and Hotel Attention Rebounds

Long-term rental apartments/service apartments are the most popular among all asset types for investors due to their stable market demand and policy support, especially in Beijing and Shanghai. The introduction of public offering REITs is conducive to realizing the "investment, financing, management, and exit" of long-term rental apartments/service apartments, thereby driving the increase in transaction attention. From the perspective of investor types, insurance capital institutions and real estate private equity funds are the main forces in investing in long-term rental apartments/service apartments. In addition, compared to before the epidemic, investors' confidence in the hotel business format has increased.

Attention to real estate investment opportunities - Commercial, Office, Residential, Data source: Cushman & Wakefield

The Institutional Attention on Grade A Office Buildings and Business Parks Declines, and Transactions Are Mainly for Self-Use Buyers

The decline in institutional attention on Grade A office buildings and business parks, as well as the tilt of transaction activities towards self-use buyers, indicates that the market is undergoing structural changes. In the current economic environment, there are obvious differences in the investment logic of institutional investors and self-use buyers for office properties. The market has shifted from being dominated by institutional investors in previous years to being dominated by self-use buyers currently, especially those enterprises that seek a stable office environment and long-term asset holdings, and are more inclined to directly purchase Grade A office buildings and business parks. These buyers usually pay more attention to the long-term value and strategic suitability of the property rather than short-term market fluctuations. Although the market as a whole faces challenges, the activity of self-use buyers provides a new perspective and opportunity for the market.

The Attention on Shopping Centers, Outlets, and Community Businesses Has Significantly Increased

With the reduction of the impact of the epidemic and the successive listing of consumer infrastructure public offering REITs, investors' interest in retail properties has significantly rebounded, returning to the confidence level before the epidemic. Previously, investors' investment enthusiasm for retail properties was mainly concentrated in first-tier cities. With the launch of public offering REITs, it is expected to significantly increase investors' interest in the retail property markets of new first-tier and second-tier cities, thereby enhancing the activity and market liquidity of retail property transactions in these cities. This change not only provides investors with more diversified choices but also injects new vitality into the retail property market in non-first-tier cities.

The Attention on Warehousing and Logistics Has Decreased, While the Attention on Data Centers and Industrial Plants Has Increased

Investors have obvious differences in regional choices for different sub-sectors. Among the four major first-tier cities, the industrial asset with the highest attention in Beijing is the data center, while in Shanghai, it is the industrial plant. In Shenzhen and Guangzhou, the asset with the highest attention is the warehousing and logistics asset. In this survey, the investment attention on industrial plants has significantly increased. With the surge in demand for large models and cloud computing, data centers, as a key infrastructure, are rapidly becoming the focus of investors' attention. In 2024, investors' attention to the warehousing and logistics business format has significantly declined, mainly due to the oversupply of warehousing and logistics in some areas of the country, and the rent and occupancy rate have both declined, resulting in investors' lack of confidence in this business format.

Attention to investment opportunities in industrial assets, Data source: Cushman & Wakefield

Investors Recognize the Risk Resistance Ability of Long-Term Rental Apartments/Service Apartments

The survey results show that the capitalization rates of Grade A office buildings in the core areas of Shanghai and Beijing are the lowest among all cities and regions, ranging from 4.5% to 5.6% and 4.6% to 5.6% respectively. The capitalization rates of long-term rental apartments/service apartments follow closely, with 4.6% to 5.5% in Shanghai and 4.7% to 5.5% in Beijing.

For most assets, the sellers' psychological expectations for prices have significantly decreased. For first-tier cities, the overlapping part of the buyer and seller of warehousing and logistics assets is 5.1% - 5.8%, which has increased significantly compared to previous years; there is still a certain gap between the buyer and seller's expectations for the capitalization rate of the data center. For first-tier cities, the capitalization rate of the data center is between 7.2% and 8.6%; the capitalization rate range of industrial plant assets is between warehousing and logistics and data centers. For first-tier cities, the capitalization rate of industrial plants is 5.5% - 6.1%.

For the changing trend of the capitalization rate in the next year, the vast majority of respondents expressed a relatively cautious attitude and gave an upward judgment. However, for long-term rental apartments/service apartments in first-tier cities, respondents generally believe that the capitalization rate will remain stable.

Capitalization Rate Is an Important Part in the Pricing of Public Offering REITs Products for Real Estate Infrastructure

As of September 2024, a total of 45 infrastructure public offering REITs have been issued in the market, of which 27 are real estate projects. The underlying assets are mainly industrial parks, industrial plants, warehousing and logistics, indemnificatory rental housing, and consumer infrastructure.

The pricing process of mainland public offering REITs usually goes through three stages. Before the issuance, an asset valuation is obtained by discounting the operating expectations of the underlying assets; then, offline investors give a quotation range based on the valuation result and combined with their own understanding and judgment of the asset and product, and then the public fund manager and the issuer determine the issue price of the REITs listing; finally, after the listing, the free buying and selling by many investors will form the immediate secondary market price. It can be seen that the asset valuation at the time of issuance is the "cornerstone" of the subsequent pricing and secondary price. And the requirement of the mainland REITs guidelines to use the income approach as the main valuation method reflects the emphasis on the asset's operating performance, which is in line with the product characterization of REITs that "emphasizes operating performance rather than the main body credit". Therefore, as an indicator that reflects the operating return rate of the asset itself, taking the capitalization rate as a reference is an important part in the pricing of public offering REITs products for real estate infrastructure.

Zhang Kailing, Vice Director of the Valuation and Advisory Services Department in Beijing, Cushman & Wakefield, and the editor-in-chief of the Capitalization Rate Research Report, said that the capitalization rate reflects investors' expectations of asset returns and their assessment of risks and potential returns. In 2024, although the domestic risk-free interest rate has decreased, the rent pressure in the real estate market and the reduction in transaction liquidity have led to a general increase in the capitalization rate. In this environment, anti-cyclical assets such as long-term rental apartments are particularly attracting investors' attention.