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Rate cuts help Chinese Real Estate, but risk remains

The Chinese real estate market should improve in the fourth quarter, following a series of interest rate cuts, sources said.

BlackRock’s head of Chinese equities, Helen Zhu, noted recently that she is optimistic about the Chinese real estate sector and she sees improvements in the sector’s fundamentals.

Zhu, who heads the BGF China Fund, increased Chinese REIT exposure in 2014. That additional allocation has helped the fund beat its benchmark (the MSCI EM China 10/40 Net TR) this year to September compared to the same period last year, said Luke Ng, senior vice president of FE Advisory Asia.

Aberdeen Asset Management noted that China is now an economy dominated by services, and it said real estate is one of the key sectors that will likely drive the economy. The firm also believes that the actual contribution of the key sectors is under-reported.

China’s latest interest rate cut should further improve housing affordability by lowering the cost of mortgages, added CBRE. But the firm pointed out that the office space and retail segments remain depressed – the former due to a supply glut while the latter has been impacted by competition from e-commerce.

Real estate assets are also vulnerable to currency movements. Matthias Meyer, Deutsche Asset and Wealth Management’s head of liquid real assets for Europe and Asia, told Fund Selector Asia that real estate typically require a five-seven year investment, and currency weakness could erode returns.

China’s real estate risk premium is the second highest in Asia after Malaysia, added Andy Schofield, TH Real Estate’s director of research.

“Partnering with a credible local counterpart is a more effective entry route into Chinese real estate. For property stocks, assessing core stock in China may be difficult as much of the Grade A office space falls short of international build standards.”

Part of the Mark Allen Group.