China's commercial real estate woes spark distressed sales surge

Over a fifth of the Chinese commercial real estate deals in 2023 were distressed sales, underlining the gravity of the real estate crisis in Asia's largest economy.

According to MSCI Real Assets, the total sales of offices, factories, retail, hotels, flats, senior housing, and other commercial properties in China were $38.6 billion in the previous year, compared to $60.3 billion as recently as 2021.

More than 20% of commercial real estate transactions in 2023 involved distressed sales, or transactions involving buildings placed into receivership. This was the highest percentage since MSCI started tracking this data in 2019. In 2022, 11% of transactions were distressed, compared to 9% in 2019.

The 20% number, according to Benjamin Chow, head of real estate research for MSCI in Asia, is a considerable percentage, given that some non-troubled agreements were made by distressed developers in need of money. In 2023, the industrial sector accounted for about half of all distressed acquisitions.

This year, a sizable amount of Chinese commercial real estate sales have also consisted of distressed transactions. According to MSCI, 3 billion yuan ($1.4 billion) of the 9.8 billion yuan ($1.4 billion) in transactions in the first two months came from distressed sales. Deals worth $50 million or less accounted for the majority of the sales.

A growing percentage of distressed deals has encouraged some investors, who believe this could be a sign that the commercial real estate market is about to bottom out.

Chief investment officer for Asia fixed income at Allianz Global Investors, Jenny Zeng, stated that developers who raise cash through disposals may be able to strengthen their capital structure and creditworthiness, which would increase the confidence of fixed-income investors.

Insurers and government-backed organizations actively purchased Chinese commercial real estate in the previous year. A Tianjin scientific park owned by developer Wanhe Technology, which went into default, was acquired by Tianjin Hongda Technology Innovation Industry Development, a government-controlled company, for 2.8 billion yuan in the first quarter of 2023.