A commercial property under construction in the Pudong area of Shanghai. The Chinese mainland is drawing more attention from foreign institutional investors. In Shanghai, there were seven transactions of commercial properties in the first quarter, totaling 4.6 billion yuan ($708 million). [Photo/China Daily]

Foreign investors jump on the band wagon but some experts warn it is a big bubble

SHANGHAI - White collar worker Chen Yan is a marketing assistant working in a high-rise building along Middle Huaihai Road, Shanghai's iconic high street.

In recent months, the 30-year-old has been finding he has had to pay increasingly large sums of money for his lunch as many nearby restaurants close down because of high rents.

"Many restaurants have closed recently amid the influx of many top luxury brands in the road," Chen said. Since last year, Louis Vuitton, Tiffany & Co, Cartier, Ermenegildo Zegna and Hermes have begun to open new branches or expand their floor space in premium sites.

"As a result, the cost of lunch has risen from 20 yuan ($3.08) to 35 yuan," said Chen, one of more than 70,000 professionals who work along the road.

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However, in the eyes of some heavyweight investors, Chen's complaint sends a strong signal that Shanghai is entering a bullish market for commercial property investment.

Treasury China Trust, a business trust registered in the Republic of Singapore and Ireland's leading property company, purchased Huaihai Mall for 575 million yuan in February. The Irish property investor plans to undertake a total refurbishment and repositioning of the four-story building to double its rental revenue over five years, according to an expert close to the deal.

Huaihai Mall is currently 70 percent occupied, and the rental is somewhat below the market average, leaving substantial room for future increases. "The company successfully renovated Central Plaza, which is located in Shanghai's central business district," said Cindy Ma, manager of marketing and communications with Treasury Holdings (Shanghai) Property Management Co Ltd. After renovation, the building's market value increased 17 percent and the rental surged 25 percent on average, Ma added.

In order to better invest in China's property market, Treasury Holdings quit the Alternative Investment Market (AIM), a sub-market of the London Stock Exchange for smaller companies, and listed in Singapore in June 2010. Currently, the company has all its listed capital in China.

Treasury Holdings is not the only overseas investor in China's commercial property market to believe the next decade is ripe for exploitation after the investment boom in the residential property market over the past decade.

"The Chinese mainland is drawing more attention from foreign institutional investors. In Shanghai, there were seven transactions of commercial properties in the first quarter, totaling 4.6 billion yuan. Of them, 50.4 percent were made by domestic investors, including companies from Taiwan and Hong Kong, while foreign investors took 49.6 percent," said Jack Ye, national director of investment at Cushman & Wakefield China.

According to Ye, offices accounted for 44.5 percent of the total transactions, mixed use was 22 percent, retail was 12.5 percent and the hotel sector was 21 percent.

"These deals show foreign investors are more interested in purchasing commercial properties in China," said Regina Yang, director of research and consultancy with Knight Frank, a global property service provider.

In 2010, en bloc real estate investment reached a record $15.02 billion, up 34.6 percent compared with the year before, a Jones Lang LaSalle report said. This is in sharp contrast with the weakened property market in the United States and Europe, which are still suffering from the fallout of the global financial crisis.

The new investment wave was also triggered by the central government's tough restrictions on residential property trading, which diverted capital into the commercial property market, especially in first-tier cities.

Rather than offering commercial property just for rent, some developers are trying to diversify to increase their profits. Japanese Mori Group, the developer of China's tallest building, Shanghai World Financial Center (SWFC), sold offices separately.

"Since the completion of our building, we have received many inquiries from our clients to buy office space for their own use, and we are delighted to offer such a service," said Pan Bei, who is in charge of Mori Building China (Shanghai) media relations.