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China and its Real Estate Market: Transition from High Economic Growth to High Consumer Class Expansion

Youguo Liang, PhD, CFA March 2013

THE CHINESE CONSUMER CLASS

Second largest economy with high growth potential China is still a poor country with low per capita GDP The consumer class, however, is much wealthier Consumer class expansion will drive demand growth for commercial real estate Size of the commercial real estate market is directly linked to consumer class GDP As China becomes more developed, commercial real estate will represent a larger share of its economic output China will be the top growth contributor to global higher-grade real estate

SECOND LARGEST ECONOMY WITH HIGH GROWTH POTENTIAL

2012 GDP (USD Billion) UNITED STATES CHINA JAPAN GERMANY FRANCE UNITED KINGDOM BRAZIL RUSSIA INDIA MEXICO SOUTH KOREA INDONESIA TURKEY
Source: Economist Intelligence Unit, Feb 2013

2022 GDP (USD Billion) 24,585 23,982 5,921 4,193 3,518 3,269 3,990 4,201 6,002 2,355 2,246 2,444 1,661

CAGR 4.6% 11.3% 0.1% 2.1% 3.0% 2.9% 5.8% 7.6% 12.3% 7.0% 7.2% 10.9% 7.7%

15,724 8,231 5,887 3,401 2,627 2,458 2,260 2,016 1,881 1,194 1,125 872 790

BUT STILL A POOR COUNTRY WITH LOW PER CAPITA ECONOMIC OUTPUT
GDP PER CAPITA IN 2012 AND 2022 (000 USD)
80

60

40

20

0 2012 2022

CHINA

SOUTH KOREA

UNITED STATES

THE CONSUMER CLASS, HOWEVER, IS MUCH WEALTHIER

CURRENT GDP PER CAPITA OF THE CONSUMER CLASS (000 USD)
50

40

30

20

10

0
India China Mexico South Korea Russia Brazil U.S.

CONSUMER CLASS EXPANSION WILL DRIVE DEMAND GROWTH FOR COMMERCIAL REAL ESTATE
CONSUMER CLASS POPULATION IN CHINA (MILLIONS)
750

CAGR: 5.6%
600

450

CAGR: 9.6%
300

150

2012

2022

2032

SIZE OF THE COMMERCIAL REAL ESTATE MARKET IS DIRECTLY LINKED TO CONSUMER CLASS GDP
TOTAL AND CONSUMER CLASS GDP OF CHINA (USD TRILLION)
30

20

10

0 2012 CHINA CONSUMER CLASS GDP CHINA TOTAL GDP 2022 US GDP

AS CHINA BECOMES MORE DEVELOPED, COMMERCIAL REAL ESTATE WILL REPRESENT A LARGER SHARE OF ITS ECONOMIC OUTPUT
CHINA REAL ESTATE MARKET SIZE (USD TRILLION) AND SHARE OF GDP (%)
12 40%

35% 10 30% 8 25%

20%

15% 4 10% 2 5%

0 2012 2022

0% 2012 2022

CHINA REAL ESTATE ($ TRILLION)

REAL ESTATE AS SHARE OF GDP

CHINA WILL BE THE TOP GROWTH CONTRIBUTOR TO GLOBAL HIGHER-GRADE REAL ESTATE
CONTRIBUTION TO GLOBAL REAL ESTATE GROWTH (2012-2022)

China U.S. India Brazil Russia U.K.

33.0% 14.2% 5.5% 4.9% 4.5% 2.6% 2.2% 2.0% 1.9% 1.6% 1.5% 1.4% 1.1% 1.1% 1.1% 1.0% 0.6% 0.6% 0.5% 0.2% 18.6%
0% 5% 10% 15% 20% 25% 30% 35%

Germany
S. Korea Canada France Turkey Singapore Mexico Italy Japan Australia Spain Netherlands Sweden Switzerland Others

FROM HIGH ECONOMIC GROWTH TO CONSUMER CLASS EXPANSION

o China is becoming the number one contributor to global growth of institutional-quality real estate due to strong economic growth, massive urbanization, rising consumer class and global economic integration
o True demand driver for high-quality real estate of all types is the size, growth and purchasing power of the consumer class, which is expanding much faster than the slow rate of population growth in China o High demand growth, low carry costs and relatively limited alternative investment opportunities will ensure a high imbedded cyclicality in the growth and expansion of Chinas real estate market

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