Income property market lacks vital building blocks

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Income property market lacks vital building blocks

(Global Times) 14:51, August 14, 2013

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In October 2010, China's central government allowed insurance companies to invest in income-generating properties. Prior to this, insurers could only own property for their own use.

Understanding of investment in commercial real estate has developed slowly in some parts of the world. In the 1940s and 1950s, conventional financial wisdom in many Western countries had it that long bonds were the best investment vehicles for institutions. Although these products typically promise limited returns, they at least allow for long-term, low-risk capital growth.

But changes in the market meant that from the mid-1960s to mid-1970s, most of the world's stocks had difficulty producing positive nominal and real returns for investors. As a result, the first half of the 1970s saw institutional investors in North America begin to seriously study an asset class which European fund managers had for years employed as a basic defense against unanticipated spikes in inflation - income-producing real estate.

In Europe, inflation drove investment in property. Direct investment in income-producing real estate provides capital appreciation even during periods of inflation. And as an added bonus, it also creates a steady cash flow.

Institutional investors in the US were somewhat late to tap this part of the real estate market, although they eventually made the leap during the 1980s as the country sank into economic recession. Over the proceeding decades, investment groups have gained expertise and experience from professional real estate practitioners who have been able to observe the changing market firsthand.

The shift to institutional real estate investment in China has occurred much later than in the West and has been driven by a dearth of quality investment vehicles, changes in legislation and inflation fears.

But in China, there is still a shortage of investment-grade real estate in the market. It took the US 10 years to adopt an investment strategy that Europe had taken 25 years to complete - and now China is making the same transition 25 years after the US. Young professionals working in China today can look to the mistakes and experiences of the West for guidance, but the lack of quality income-generating properties in the country means that most local investment subsidiaries are missing the targets set by their parent companies.

Compounding this problem, of course, is the fact that there are still very few real estate professionals in China with in-depth industry knowledge pertaining to income-generating properties. This means that there are few experts who can help developers construct buildings suitable for institutional investors.

The article was compiled based on an interview with Bruce Sutherland, CEO of Sutherland Consulting.

（Editor：ChenLidan、Gao Yinan）