The evolving dynamic of development sites and commercial real estate in China

In recent years, the major real estate investment managers have taken on global real estate portfolios, capturing the advantages of international portfolio diversification and exposure to new real estate markets. This includes major players such as Blackstone, Brookfield, MetLife, PGIM, Nuveen, CBRE, Prologis and LaSalle, with the top 150 real estate investment managers having over $6.4 T in real estate assets under management (IPE, 2023). This has been driven by the strong appetite for international real estate by the leading real estate investors, including Allianz, Government Investment Corporation (Singapore; GIC), China Investment Corporation (CIC), Abu Dhabi Investment Authority (ADIA), Government Pension Fund Global (Norway; GPFG), APG (Netherlands), California Public Employees' Retirement System (USA; CalPERS) and Canada Pension Plan Investment Board (CPPIB). The top 150 institutional investors in real estate have over $2.1 T in real estate in their portfolios (IPE, 2024); typically seeing real estate accounting for 5–10% of their total portfolio.

Importantly, this global real estate exposure includes both the traditional developed markets (e.g.: US, Europe, Australia, Japan) and the emerging markets (e.g. China). In particular, for China, investors have sought China real estate exposure to capture the dynamics of the economic growth of the Chinese economy. China is now the second-largest global economy, with China accounting for over 18% of global GDP, and being a major economic success story in the last 25 years. This China real estate exposure has been achieved by direct real estate, non-listed real estate vehicles, and listed real estate vehicles (Real Estate Investment Trusts (REITs) and real estate operating companies (REOCs)).

With commercial real estate (e.g. office, retail, industrial real estate) providing the essential physical infrastructure to drive this economic success for China, this has seen considerable growth in the commercial real estate markets in China. Being an emerging market, development sites in China have been a fundamental ingredient in the growth of the Chinese commercial real estate markets, being a catalyst to specific commercial real estate developments. This has particularly been the case in China, where there is a government legal requirement that development sites commence building within two years of the development sites being acquired.

To assess this dynamic relationship between development sites and commercial real estate in China, specific research questions (RQs) addressed in this article include:

These four RQs will be assessed over 2007-Q3:2024, providing an evidence-based analysis over a critical phase of the real estate sectors' development in China over this 18-year period. This article is structured as Section 1: Introduction, Section 2: Significance of China and commercial real estate in China, Section 3: Literature review, Section 4: Methodology, Section 5: Research findings, Section 6: Discussion and Section 7: Conclusion.

Given the importance of commercial real estate in China, and the dominant role of development sites in China, the rationale of this research is to examine the dynamics of the role of development sites in providing the fabric of commercial real estate in China in recent years. This is assessed by examining the relationship between development sites and commercial real estate transactions, and whether commercial real estate has made an increased contribution (both $ and %) to real estate transactions in China in recent years. The expectation is that commercial real estate in China has taken on an increased role compared to development sites in China in more recent years, as the flow-through from completed real estate projects on these development sites takes on increased significance, reflecting the growth and increased maturity in the China commercial real estate market.

This article has a strong link to the previous research of Stan McGreal (being the theme of this special issue of JERER) by extending his earlier research on the significance of development sites globally (Newell and McGreal, 2017). In particular, this article examines the significance of development sites in China and the subsequent flow-on effect into the commercial real estate space in China over 2007-Q3:2024.

Before drilling into the specific research questions, it is important to establish the context to the economic development of China, the commercial real estate markets in China, and the role of development sites in China.

China has emerged as a major economic growth engine at a global level over the last 25 years. Table 1 highlights the key dimensions to this economic success story for China, at both a domestic and international level.

With the world's second-largest population (only exceeded by India) and increased levels of urbanisation, this now sees major urban populations in China, with six cities having populations exceeding 12 million.

This ongoing economic success for China is seen in the real GDP growth for 2023–2024 (5.7% and 4.8% respectively). Whilst this real GDP growth has slowed in recent years, it is still above global GDP growth over these two years. This is further reinforced by strong global competitiveness, reduced corruption levels, and globally competitive stock markets in China (in both Shanghai and Shenzhen).

Overall, these drivers of economic growth, favourable demographics, increased domestic consumption and increased overall market maturity have been fundamental to the economic success of China.

The economic growth story for China has had significant implications for the commercial real estate markets in China, at both the domestic, regional and international levels. Real estate investors in China have included international players, Asia players and China players, with Table 2 giving details of the major real estate investors in China at these three levels of China commercial real estate investor.

The transparency of the China real estate markets has improved considerably in recent years, currently being #30 globally (JLL, 2024a). This has seen China moving from low transparency (over 2004–06) to semi-transparent (over 2008–18), to transparent (2020–2024), with China's global transparency ranking increasing from #49 (in 2008) to #35 (in 2014), to #32 (in 2020) and to #30 in 2024 (JLL, 2024a). The China real estate markets are ranked #6 in Asia in 2024 for real estate market transparency; only exceeded by Japan (#11), Singapore (#13), Hong Kong (#15), Taiwan (#26) and South Korea (#27) (JLL, 2024a). Improved levels of real estate transparency are critically important when institutional investors are considering real estate exposure in these emerging markets.

China has also seen significant levels of commercial real estate transaction activity in recent years, being ranked #3 globally ($36.1 B) in 2023. This sees the major Chinese cities of Shanghai (#7; $14.8 B) and Beijing (#23; $4.7 B) being in the top 25 cities globally for commercial real estate transaction volumes in 2023. China has also recorded some of the largest commercial real estate sales in Asia in recent years (MSCI/RCA(Real Capital Analytics), 2024). This includes:

1. 2020: Beijing office ($1.1 B; #3 in Asia), Guangzhou industrial ($1.1 B; #4 in Asia), Shanghai office ($843 M; #8), with 3 of the top 10 commercial real estate transactions in Asia in 2020 being in China

2. 2021: Beijing office ($1.4 B; #2 in Asia), Shanghai office ($1.2 B; #3), Beijing office ($933 M; #4), with 7 of the top 10 commercial real estate transactions in Asia in 2021 being in China

3. 2022: Shanghai office ($1.8 B; #2), Shanghai office ($1.1 B; #3), Shanghai office ($1.1 B; #4), with 5 of the top 10 commercial real estate transactions in Asia in 2022 being in China

4. 2023: Guangzhou office ($591 M; #8), Beijing office ($578 M; #9), Shanghai hotel ($546 M; #10), with 3 of top 10 commercial real estate transactions in Asia in 2023 being in China

5. 2024 (to Q3): Nanjing retail ($550 M; #7), with 1 of top 10 commercial real estate transactions in Asia in 2024 being in China.

This commercial real estate transaction activity sees China as being internationally competitive amongst the global commercial real estate markets. Major international real estate investors in China in recent years include Blackstone, GIC, CapitaLand, GLP and CDL, whilst major local real estate investors include Ping An, China Construction Bank and China Life (MSCI/RCA, 2024). This further reinforces the international stature of China commercial real estate and the high level of institutional investor interest, both by international players and local players.

Some of China's major cities were also seen amongst the leading cities globally for city “momentum”; based on 20 socio-economic and real estate indicators (JLL, 2020a). This sees China having 5 of the top 20 “momentum” cities globally in 2020, including Shenzhen (#10), Chongqing (#11), Wuhan (#13), Hangzhou (#15) and Shanghai (#17).

Importantly, China established a REIT market in 2021. In 2024, there were 29 China REITs, focused on the infrastructure sector, including industrial parks, logistics and the warehouse sub-sectors, tollways and sewerage treatment plants. These real estate classes were expanded in 2024 to include data centres and shopping centres; although office buildings are still excluded from China REIT portfolios. Table 3 provides details of some of the leading China REITs.

Real estate operating companies (REOCs) are the major listed real estate market in China; typically accounting for 10% of the China stock market. These include real estate companies with development and investment profiles, including China Resources Land and China Overseas Land and Investment (European Public Real Estate Association (EPRA), 2023). Several REOCs involved in the housing sector in China (e.g. Evergrande) have experienced considerable financial issues in recent years, reflecting the downturn in the China housing market. Table 3 provides details of some of the leading China REOCs (EPRA, 2023).

In addition to these listed real estate vehicles in China, non-listed real estate funds have been a significant real estate investment vehicle for institutional investors globally to obtain high-quality real estate exposure in China. This includes non-listed real estate funds from major international real estate investment managers (e.g. CBRE Global Investors, Nuveen, LaSalle), as well as local Asia players, often based in Hong Kong or Singapore (e.g. Ascendas, Global Logistics Property, CapitaLand, Mapletree, Gaw). This is reflected in China commercial real estate being included in both China-specific funds and in pan-Asia fund portfolios. Many of these real estate investment managers have considerable experience in China real estate investment via multiple non-listed real estate funds. Table 3 gives examples of non-listed China real estate funds from the major real estate investment managers globally. These reflect a range of fund styles, including opportunity real estate funds.

International investors are only able to use leasehold as the legal ownership structure (no freehold) for commercial real estate in China, where the leasehold term for commercial real estate in China is limited to 40 years, the leasehold term for industrial real estate is limited to 50 years and for residential real estate is limited to 70 years (JLL and Ashurst, 2024). This limitation to only being able to invest in leasehold real estate applies both at the individual real asset and real estate fund levels. Full details of the legal and operational processes for acquiring real estate in China for institutional investors are given in JLL and Ashurst (2024).

Overall, this has seen China transition from being an emerging commercial real estate market to becoming an internationally competitive commercial real estate market. This reflects strong interest from domestic real estate investors, regional real estate investors and international real estate investors to access the commercial real estate dimension of the China economic growth dynamic.

Development sites are a key component in the real estate transaction space in China. In particular, China has adopted the strategy that sales of development sites can be used as a vehicle to promote economic growth, with the success of this policy reflected in the various parameters relating to social, economic, financial and real estate market growth (see Table 1). Local authorities have played a pivotal role in the development process, where local governments have used rural land expropriation as a lucrative business, with the revenues generated significantly bolstering the finances of local governments (Newell and McGreal, 2017).

Importantly, with a Chinese government requirement to commence development on the acquired development site within two years, this sees further substantial flow-through from development sites to completed commercial real estate projects in the medium term, suggesting a positive context for the continuing role of development sites in the commercial real estate landscape in China as the catalyst to enhancing the urban infrastructure in China.

Major developers of these development sites include state-controlled real estate companies (e.g. Poly Real Estate Group, Greenland, China Overseas Land and Investment, China Resources) and private real estate companies (e.g. China Vanke, Longfor Properties). Foreign capital is also evident and includes leading Singapore players (e.g. CapitaLand, Yanlord, Guocoland), Hong Kong players (e.g. Hong Kong Land, Hang Lung, New World) and US players (e.g. Hines). Again, the involvement of significant external companies is consistent with the strategy of local authorities in China in using development sites as a means to leverage foreign direct investment (FDI) and external capital market flows. Table 4 provides details of the major China commercial real estate developers. Often, this involvement by international real estate developers in development site acquisitions in China has been via a joint venture arrangement with a major local real estate developer. Local China real estate developers with major development site acquisitions in recent years (2020–2024) include China Poly ($26.2 B; # = 122 acquisitions), Greentown China ($14.8 B; # = 62), China Railway Construction ($9.7 B; # = 21), China State Engineering ($8.9 B; # = 57), Hangzhou Binjiang RE ($8.5 B; # = 37), Xiamen C&D ($7.7 B; # = 40), China Vanke ($5.9 B; # = 33), Zhuhai Huafa Industry ($5.3 B; # = 15), China Jinmao ($5.2 B; # = 24) and China Railway Group ($3.8 B; # = 71) (MSCI/RCA, 2024).

Table 5 provides examples of major development site transactions in China in recent years, with the development sites subsequently used for major commercial, mixed-use and residential developments. While the focus of this development site activity in China was been on the major cities, such as Shanghai, Beijing, Guangzhou, Shenzhen and Tianjin, a significant number of other Chinese cities have seen major development site activity in recent years. These cities include Hangzhou, Wuhan, Suzhou, Nanjing, Chongqing, Chengdu, Zhuhai, Xiamen, Dalian, Foshan and Changsha (MSCI/RCA, 2024). This sees development sites as an important element of the platform needed for effective commercial real estate infrastructure in China to facilitate the economic growth of China in recent years and going forward, as China continues its significant economic transformation.

The success of this development site strategy by China is clearly shown in the sheer scale of development site activity in China over recent years. Over 2007-Q3:2024, there have been over 103,810 development site transactions in China, with over $7.0 T in development site transaction value. This development site transaction activity in China accounted for 92.3% of real estate transaction value in China over 2007-Q3:2024. Over this period, this sees China development sites accounting for 79.8% of global development site transaction value ($8.78 T) and 63.6% of global development site transactions (163,113) (MSCI/RCA, 2024). This level of development site transaction activity in China clearly exceeds the development site activity in other emerging markets in Asia (e.g. India), as well as that seen for countries in Europe and the US (Newell and McGreal, 2017). Fuller details of the significance of development sites in China from both a China and international perspective will be given in a subsequent section of this article.

Overall, this section has set a strong context for the importance of development sites and the flow-through effect for commercial real estate in China. The following sections will explore the dynamics between these two important components of the China real estate market and the real estate investment implications.

There is a substantial body of knowledge concerning commercial real estate in China. This covers direct real estate, listed real estate and non-listed real estate in China; from both a China-specific perspective and from a China in a pan-Asia real estate portfolio perspective.

For direct commercial real estate in China, issues assessed include the role and performance of China real estate in a portfolio (e.g.: Chau et al., 2010; Newell et al., 2005, 2009), China real estate office market rental dynamics (Ke and White, 2009) and the level of market maturity in the China real estate markets (Ke and Sieracki, 2015). This research highlighted the added-value performance benefits of China direct commercial real estate in a portfolio for institutional investors (Chau et al., 2010; Newell et al., 2005, 2009), as well as the dynamics of the rental adjustment process in the major China office markets of Shanghai and Beijing being assessed (Ke and White, 2009), seeing both supply and demand determinants of office rents and a slower rental adjustment in the Shanghai and Beijing office markets compared to other office markets. Improvements needed in the pathway to enhanced real estate market maturity and transparency in China were also identified (Ke and Sieracki, 2015), with many of these improvements needed having been subsequently implemented, as China has seen significantly improved real estate market transparency in recent years (JLL, 2024a).

For listed real estate, issues relating to the performance of listed real estate in China from a China, Greater China and pan-Asia perspective have been assessed (e.g. Chau et al., 2010; Liow, 2008; Liow and Adair, 2009; Liow and Newell, 2012; Newell et al., 2005), as well as the development of the recently established REIT market in China (Piao and Mei, 2023). Whilst being over different timeframes, this research has highlighted the potential risk-adjusted returns performance and portfolio diversification benefits of listed real estate in China in both a China-specific and Asia context. This research has seen evidence of the close alignment of listed real estate with the overall stock market in China, as is evident in research into other listed real estate markets (Liow and Adair, 2009; Liow and Newell, 2012). Research to date concerning the recently established China REIT market has been limited to structural and operational issues (e.g. Piao and Mei, 2023), with the lack of a sufficient time frame to enable a rigorous and reliable mixed-asset performance analysis of the role and risk-adjusted performance of China REITs.

For non-listed real estate in China, Cho (2018) examined non-listed real estate funds in China over 2010–2015 at the macro level. More recently, Newell et al. (2023) considered the role of fund style in China non-listed real estate funds, particularly focusing on the performance of China opportunity real estate funds over 2003–2020. Importantly, with non-listed real estate funds being the preferred real estate investment vehicle for pension funds and other institutional investors, Newell et al. (2023) highlighted the significant role of China opportunity real estate funds in a China mixed-asset portfolio across most of the mixed-asset portfolio risk spectrum. To deliver this China real estate exposure, pan-Asia opportunity real estate funds were seen to be more effective than pure-China opportunity real estate funds, reflecting the benefits of geographic diversification in a real estate portfolio. Non-listed opportunity real estate funds were also seen to be more effective than listed real estate for real estate exposure in China, reflecting institutional investor preferences for non-listed real estate exposure in China.

All of the above academic research on the commercial real estate markets in China has added further depth to our understanding of the importance and mixed-asset portfolio benefits of China commercial real estate in a portfolio at a China, pan-Asia and global real estate portfolio level using a range of listed and non-listed real estate vehicles.

Importantly, in addition to this academic research, the major real estate advisory companies also have a strong China presence and produce regular high-quality real estate market reports on China (e.g. CBRE, 2024a, b, c, d; Colliers, 2024a, b, c; JLL, 2020, 2024a, b, c, d). This is also supported by the major professional economic advisory groups and global organisations in providing up-to-date information on China's economic and investment environment (e.g. KPMG, 2024; PwC, 2024; World Bank, 2024a, b). These industry-based reports add considerable richness and understanding to the context of commercial real estate in China.

The recent literature concerning real estate development in China has addressed specific unique local issues that are a fundamental component of the significant transition of land use in China. This includes land development (Bao et al., 2012; Sun, 1998; Xu et al., 2009), land development controls (Ng and Xu, 2000), redevelopment of urban villages (Hao et al., 2011; Wang et al., 2009; Wu, 2009; Yeh and Li, 1999), urban spatial development (Ding, 2004; Lin, 2007; Zheng et al., 2018), land usage changes (He et al., 2014; Wu and Yeh, 1997), private sector development (Atherton and Smallbone, 2013), role of overseas developers (Leung et al., 2011), land use investment growth (Liu et al., 2008) and development land valuation accuracy (Dou et al., 2021).

This research regarding the land development processes in China clearly identified land use and land management issues to demonstrate the significant structural changes in China's real estate development markets resulting from China's transition to a market economy, reflecting China's modernisation and increased urbanisation. The land policy changes, land use changes and reforms in China were demonstrated at various levels, reflecting national impact, regional impact (Ng and Xu, 2000; Wu and Yeh, 1997; Yeh and Li, 1999) and city-level impact (Ding, 2004). In several cases, this research focused on the development and transformation of urban villages in China (Hao et al., 2011; He et al., 2014; Wang et al., 2009; Wu, 2009). Issues relating to industrial land valuation accuracy were also assessed (Dou et al., 2021), particularly concerning the construction and use of the land benchmark price (LBP) by the government as the reference point to sell land rights, seeing a discrepancy in industrial land valuations.

Whilst these papers considered the various land development and land use issues in China at various levels, they were focused on articulating the various structural changes in land usage in China, without any in-depth empirical analysis of development sites. Only Newell and McGreal (2017) considered the importance of China's development sites in a global perspective by assessing development site transaction activity in China over 2007–2014. In particular, Newell and McGreal (2017) found that development sites in China made a significant contribution to real estate transaction activity in China, accounting for over 28,700 development site transactions at $1.6 T over this 8-year period. This saw China development sites accounting for 93% of real estate transaction activity in China, clearly exceeding all other international real estate markets (e.g. India (73% of real estate transaction activity), Malaysia (53%)). China was also seen to account for 88% of development site transaction value in the Asia–Pacific and 80% of global development site transaction value. This clearly demonstrates the importance of development sites in a China real estate context and in a global context.

Overall, this literature review has clearly articulated the body of knowledge concerning the China real estate markets and China development sites. This current article seeks to fill a research gap in the real estate literature in expanding our strategic understanding of the China real estate markets by examining real estate transaction activity in China to assess the dynamics of the relationship between development sites and commercial real estate in China over 2007-Q3:2024. The expectation is that more recent years have seen a stronger focus on commercial real estate transactions, as development sites have been developed with these major commercial real estate developments.

To examine the significance of development sites and commercial real estate transactions in China, development sites and commercial real estate transactions were assessed over 2007-Q3:2024 using the MSCI/Real Capital Analytics (RCA) database. To reinforce the stature of this global real estate transactions database, MSCI/RCA (previously RCA) track the sale of commercial real estate/development sites of at least $10 million each for over 75 countries in the Americas, Europe, Middle East and Africa (EMEA) and Asia–Pacific, and unlike other leading commercial property transaction databases, MSCI/RCA specifically includes development site transaction activity. To ensure data integrity and comprehensive reliable information, MSCI/RCA tracks real estate transactions via published reports, public filings, industry relationships and leading data partners in specific markets. The stature of this MSCI/RCA real estate transactions database sees it as the benchmark for global real estate transaction activity, covering both commercial real estate and development site transactions across the developed and emerging real estate markets.

Over the 18-year period of 2007-Q3:2024, this extensive MSCI/RCA real estate transactions database comprised 663,074 transactions at US$23,017 billion ($23.02 trillion) in transaction value, representing the largest and most comprehensive commercial real estate transaction database available globally. Specific levels of global transaction activity are available for the real estate sub-sectors of office, retail, industrial, hotels, residential and development sites. Data prior to 2007 is not available. Over 2007-Q3:2024, transactions in the real estate sub-sectors were extensively covered; this includes office (# transactions = 113,797; transaction value = $5.08 T; 22.1% of total transaction value), retail (122,523; $2.51 T; 10.9%), industrial/logistics (107,584; $2.34 T; 10.1%), hotels (35,077; $1.10 T; 4.8%), apartments (120,980; $3.21 T; 13.9%) and development sites (163,113; $8.78 T; 38.1%) (MSCI/RCA, 2024). The integrity and depth of the China component in this MSCI/RCA transaction database are detailed in the next section.

This MSCI/RCA transactions data has been utilised in a number of other research studies and is increasingly recognised in real estate research circles as the leading database in the commercial real estate transactions space. To illustrate the diversity of research that has employed this MSCI/RCA data, examples include transaction activity during the Global Financial Crisis (GFC) in Asia (Newell and Razali, 2009), cross-border investment flows into European real estate (Newell et al., 2010), investment transactions in the retail sector in major Australian capital cities (McGreal and Kupke, 2014), capital market flows into Australian commercial real estate (Newell et al., 2013), non-listed real estate funds in China (Newell et al., 2023), development sites globally (Newell and McGreal, 2017), global investment activity in the hotel sector (Newell and McGreal, 2015), impact of COVID-19 on global real estate capital flows (Newell and Marzuki, 2023), an analysis of London office investment (Fadeyi et al., 2023, 2025) and the analysis of global office investment (Devaney et al., 2017a, b; Fadeyi et al., 2020).

In each case, the use of this MSCI/RCA transactions database has enabled an in-depth, rigorous and critical analysis of the real estate market dynamics for a wide range of both developed and emerging commercial real estate markets, analyses at a city-level (e.g. London), country-level (e.g. Australia, US, China), regional-level (e.g.: Europe, Asia) and global-level, as well as for specific real estate sub-sectors (e.g. office, retail, hotel) and the impact of major events (e.g. GFC, COVID-19, Brexit) to gain a fuller insight into global real estate capital flow dynamics under a wide range of scenarios and contexts. Hence, these aspects reinforce the adoption of the MSCI/RCA database as the most important transaction database for this study, given its importance, depth, quality, coverage of real estate transactions, its global dimension, robustness and reliability that can be placed on this MSCI/RCA transaction data in assessing these research issues in the China real estate markets.

For the China direct commercial real estate performance analysis, total returns (in local currency: RMB) were assessed over the period of 2007–2023 using the MSCI China direct real estate index (comprising 18 portfolios, with 134 properties valued at RMB 197.1 B (US $27.8 B) in 2023) (MSCI, 2024). MSCI produces a wide range of benchmark real estate performance series for over 30 international real estate markets and is seen as the “gold-standard” for reporting global real estate performance, with these MSCI real estate performance series used in a wide range of previous real estate research papers. For the other China asset classes, stocks (MSCI China index), listed real estate (S&P China index), bonds (iBoxx China government bond index) and cash (China 90-day bill index) were used.

Overall, this sees the MSCI/RCA transactions database and MSCI real estate performance metrics as being the most appropriate data for assessing this dynamic relationship between development sites and commercial real estate in China, and the validation of the risk-adjusted performance of commercial real estate in China.

For the relationship between development sites and commercial real estate transactions ($) in China, this was assessed over several timeframes over this 18-year period, with a particular focus on the dynamic of the percentage contribution by development sites and the commercial real estate sub-sectors for these timeframes. These timeframes included individual years, as well as aggregated over 2007-Q3:2024, 2020-Q3:2024 and 2022-Q3:2024 to assess the short-term, medium-term and long-term dynamics of this evidence-based validation analysis of the relationship between development sites transactions and commercial real estate transactions in China. In assessing this dynamic relationship, the $ level and % level of each real estate sector were determined, with changes seen in these percentage levels used as a measure of the changing dynamics in the relationship between development sites and commercial real estate activity in China. Whilst being a simple analysis, it clearly highlights the dynamics of the relationship between development sites transaction activity and commercial real estate transaction activity in China, particularly with commercial real estate playing an increasingly important strategic role in the China economy.

For the China direct real estate performance analysis, risk-adjusted returns were assessed over 2007–2023. Average annual returns (in local currency: RMB), as well as annual risk, were calculated. Annual risk was determined as the standard deviation of the return series, with this being the standard risk metric in investment performance analysis. Risk-adjusted returns were assessed using the Sharpe and reward-to-risk ratios. Portfolio diversification benefits were assessed using correlation analysis between the various asset classes, with correlations approaching 1.0 seeing less portfolio diversification benefits. The direct real estate performance returns were also de-smoothed as per Geltner (1993) (smoothing parameter = 0.5) to account for the use of valuations (instead of transactions) in assessing investment performance; this is the standard de-smoothing procedure in real estate research. This saw the final time period for this China direct real estate performance analysis being 2008–2023.

The nexus between development sites and commercial real estate provides an interesting dynamic for these two sectors of the real estate market in China. This section will drill into development sites and commercial real estate transactions in China more fully and highlight key issues concerning this nexus and dynamic. Validation of the commercial real estate risk-adjusted performance in China is also provided.

Development sites are a key ingredient in the real estate landscape in China. Over 2007-Q3:2024, 105,810 development sites were transacted in China, with a value of $7.0 T; see Figure 1. The scale of this development site sector in China is seen with it accounting for 92.3% of real estate values transacted and 92.1% of all real estate transactions in China, well above the level of development sites seen globally of 38.1% by transaction value and 24.6% by transaction number (MSCI/RCA, 2024).

At a global level, the scale of the development sites sector in China is further emphasised, accounting for 79.8% of global development site transaction value and 63.6% of all global development sites transacted over this period (MSCI/RCA, 2024). Of the top 100 development site transactions globally over the last ten years, China accounted for 72% of these top development site transactions, with only Hong Kong (18% of development site transactions) seeing significant inclusions in the top 100 transactions. Other countries in Asia to figure in this top 100 development site transactions list include Malaysia, Japan, Taiwan, South Korea and India, but at a much lower level of inclusion in this top 100 list (MSCI/RCA, 2024).

Over 2007-Q3:2024, the dominant role of development site transactions in China (92.3% by value) saw a much lesser role for commercial real estate transactions in China. In particular, of the 7.7% ($586 B) of transaction values that commercial real estate accounted for in China, this comprised office transaction values (3.6%; $271 B), retail (1.9%; $146 B), industrial (1.5%; $117 B), hotels (0.6%; $45 B) and apartments (0.1%; $7 B) (MSCI/RCA, 2024). At a global level, the importance of the commercial real estate sectors to transaction value is much more important than that seen in China. Globally, of the 61.9% ($14.24 T) in commercial real estate transaction value, this sees office real estate accounting for 22.1% ($5.08 T), retail real estate accounting for 10.9% ($2.51 T), industrial real estate accounting for 10.1% ($2.34 T), hotels accounting for 4.8% ($1.10 T) and apartments accounting for 13.9% ($3.21 T) (MSCI/RCA, 2024).

With development sites being the catalyst for future commercial real estate developments in China, and the applicability of the two-year rule to start the commercial development from the time of acquisition, the key research issue is how fully this effect has already flowed through into the commercial real estate sectors and the evolving dynamic between development site transactions and commercial real estate transactions in China. The specifics of this relationship, and whether commercial real estate transactions are playing an increasing role in China will be assessed in the following section.

To examine the dynamic between development sites and commercial real estate transactions in China, and the expected increasing role by commercial real estate in China compared to development sites, real estate transaction activity in China was assessed over a range of timeframes. This included the full 18-year time-period of 2007-Q3:2024 (long-term), the last five years of 2020-Q3:2024 (medium-term), the last three years of 2022-Q3:2024 (short-term), and each of the individual years of 2020, 2021, 2022, 2023 and 2024 (to Q3). These timeframes will provide a sense of how these transaction dynamics are changing in the short-term, medium-term and long-term perspectives in China, in answering the research question (RQ3) concerning whether commercial real estate transactions are playing an increasing role in recent years, as the development sites are converted into successfully completed commercial real estate projects.

This changing transaction dynamic is shown in Table 6, which presents the percentage contributions by transaction value for development sites and the commercial real estate sub-sectors over these various timeframes. A lesser contribution by development sites is seen in recent years, decreasing from 92.30% to 87.55% over 2020-Q3:2024. As such, this saw an increase in the percentage contribution by commercial real estate transactions in China from 7.70% to 12.45% over 2020-Q3:2024. This was seen in each of the commercial real estate sub-sectors experiencing increases in their percentage allocations over this timeframe. This increased percentage allocation in the commercial real estate space was most evident for the industrial, retail, hotel and apartment sub-sectors, and to a lesser degree for the office sub-sector. Importantly, all real estate sub-sectors increased their percentage allocation to transaction value over the last 5-year period.

In particular, the retail real estate sub-sector increased its percentage allocation from 1.35% to 3.49%, the industrial real estate sub-sector increased from 2.30% to 3.39%, the hotel real estate sub-sector increased from 0.33% to 1.77%, and the apartment real estate sub-sector increased from 0.07% to 0.51% over 2020-Q3:2024. A lesser increase was seen for the office real estate sub-sector, which increased its percentage allocation from 3.66% to 3.79% over this 5-year period. While the impact of COVID-19 clearly influences the 2020 base value for this percentage allocation, COVID-19 is no longer seen as an ongoing risk factor in real estate investment strategies, being replaced by interest rate policy risk (#1), inflation risk (#2), geopolitical risk (#3) and climate change risk (#4) (Asian Association for Investors in Non-Listed Real Estate Vehicles (ANREV), 2024b).

Considering the short-term perspective of 2022-Q3:2024, similar trends were evident compared to the medium-term perspective of 2020-Q3:2024 (see Table 6). Development sites accounted for 91.92% of transaction activity in the short-term compared to 91.81% in the medium-term, and commercial real estate accounting for 8.08% of transaction activity in the short-term compared to 8.19% in the medium-term, with similar levels also seen for the real estate sub-sectors in the short-term versus medium-term timeframes.

Clear drivers behind these increased percentage allocations to commercial real estate were evident. These drivers include the increased post-COVID-19 performance of the retail real estate sub-sector, the strong performance from the industrial real estate sub-sector via the logistics and e-commerce initiatives globally, and the post-COVID-19 recovery of the hotel real estate sub-sector resulting from increased tourism and business travel activity. High-end apartments also saw continued strong performance (being the focus of the apartment component in the MSCI/RCA database). Whilst still seeing an increased percentage allocation, the lesser performance of the office real estate sub-sector reflected global concerns over the reduced long-term demand for office space post-COVID-19, resulting from reduced office space requirements by many businesses and pressures for the continuation of the working-from-home office strategy implemented during COVID-19.

Figures 2–4 also give a strong sense of the inter-play between development site transaction activity and commercial real estate transaction activity in China over 2007-Q3:2024. Figure 2 compares the growth of development site transaction activity and commercial real estate transaction activity. This is assessed on a percentage basis in Figure 3, and commercial real estate is broken into the various real estate sub-sectors in Figure 4.

Overall, there is clear evidence of an increased percentage contribution by commercial real estate in real estate transaction activity in China in recent years, compared to the traditional focus on development site transactions. This is a clear sign of the playing out of the dynamic where development sites are required to commence the commercial real estate project within two years of acquiring the development site. These increasing percentage allocations to transaction activity for all of the commercial real estate sub-sectors have clear implications for the continued delivery of high-quality commercial real estate assets in China, both for local real estate investors and international real estate investors.

Given the increasing significance of direct commercial real estate in China and the important link to development sites, it is important to assess the performance of direct commercial real estate in China for validation purposes. This will provide an evidence-based investment performance justification for the increased percentage allocations to commercial real estate transactions in China in recent years.

Table 7 presents the risk-adjusted performance analysis for China direct real estate over 2007–2023, compared with the other China asset classes. China direct real estate returns (6.30% p.a.) outperformed the other major asset classes in China over this timeframe of 2007–2023, with negative average annual returns seen for stocks (−0.11% p.a.) and listed real estate (−3.13% p.a.). Direct real estate also saw lower risk (6.48%), particularly compared to stocks (29.53%) and listed real estate (43.45%).

Overall, on a risk-adjusted basis, China direct commercial real estate was the best performing asset class (Sharpe ratio = 0.42) over this 17-year period, particularly compared to the much lesser risk-adjusted performance by China stocks (Sharpe ratio = −0.13) and listed real estate (Sharpe ratio = −0.16).

To highlight the portfolio diversification benefits of direct commercial real estate in China, Table 8 presents the various inter-asset correlations. The returns for direct real estate in China were also seen to be lowly correlated with the returns for stocks (−0.42) and listed real estate (−0.23), reflecting portfolio diversification benefits for China direct real estate. However, consistent with evidence concerning many other countries, listed real estate was seen to have negligible diversification benefits with stocks as the correlation between the two assets is 0.87. Overall, this sees China direct commercial real estate providing a significant level of portfolio diversification benefits with the other China asset classes, with equivalent diversification benefits not seen for listed real estate.

This evidence-based analysis highlights the risk-adjusted performance and portfolio diversification benefits of direct commercial real estate in China. With direct commercial real estate (i.e. office, retail, industrial) being the outcomes from the commercial development of these development sites, this analysis validates the role of commercial real estate in China and highlights the importance of these development sites as the flow-through effect of completed commercial real estate developments in China. While past performance is no guarantee of future performance, this analysis provides a strong evidence-based context for the added-value of direct commercial real estate in China and the added-value effect of the development sites that underpin these commercial real estate assets.

This analysis of development site transactions and commercial real estate transactions in China over 2007-Q3:2024 has clearly highlighted the increasing role of commercial real estate transactions in China across all of the real estate sub-sectors, as well as the strong risk-adjusted performance and portfolio diversification benefits of direct commercial real estate in China. Many institutional real estate investors have sought to capture the China economic growth dynamics via investing in China commercial real estate using a variety of real estate investment vehicles, including non-listed real estate funds (Newell et al., 2023). Importantly, as noted in the previous section, the global real estate risk factors have changed their focus in recent years; now seeing the critical commercial real estate risk factors being more focused on interest rate policy, inflation, geopolitical risk and climate change (ANREV, 2024b).

In the case of China, changes in government policy are also important, potentially impacting real estate investment. Examples of recent changes in Chinese government policy include constraints on international real estate investment for local Chinese institutional investors investing overseas in various real estate sectors (e.g. hotels), as well as seeking a stronger strategic alignment with China's “Belt and Road” international investment initiative. Similarly, how the current US-China trade tariff discussions play out for future real estate investment opportunities in China will be crucial, particularly concerning exit strategies for real estate funds and ongoing international business operations in China. All of these risk factors need to be effectively integrated into a real estate investor's strategy for achieving their China real estate exposure in their real estate portfolio, particularly with the recent downturn in the China economy.

As such, to capitalise on this increased importance of commercial real estate in China, this situation also presents challenges for the real estate investment managers with China as part of their real estate portfolio going forward. In particular, they need to ensure they are up-to-date with their due diligence concerning these new commercial real estate projects in China, particularly the changing risk factors and the lesser economic environment in China. This will be required for institutional investors as they seek effective vehicles for their China commercial real estate exposure, as China moves from being an emerging real estate market to a developed real estate market going forward. Related issues concerning the China real estate story concern other emerging real estate markets in Asia that are gathering economic momentum (e.g. India), where these emerging markets can potentially deliver better investment performance going forward, along with their improved real estate market transparency (e.g. India).

Based on this research concerning development sites and commercial real estate in China, considerable insights have been provided concerning the research questions RQ1-RQ4, both historically and going forward. Importantly, commercial real estate is seen to be playing an increased role in real estate transactions in China, with a movement away from the traditional development sites focus.

This article has clearly highlighted the nexus of the dynamics between development sites and commercial real estate in China over 2007-Q3:2024, as evidenced by the increased percentage contribution by each of the commercial real estate sub-sectors to total real estate transactions activity in recent years, as completed commercial real estate projects emerge from these development sites. This is in addition to the risk-adjusted performance analysis and portfolio diversification validation of the benefits of China commercial real estate in a mixed-asset portfolio.

With the continued importance of development sites and the continued high level of development site transactions in China, this sees a steady pipeline and flow-through effect into commercial real estate developments going forward, particularly given the two-year government requirement to commence development on the acquired development site to commence the delivery of the commercial real estate project. This will see a subsequent ongoing supply of high-quality completed commercial real estate projects in China to meet both local and international real estate investor demand, and further support the Chinese economy. This increasing role for commercial real estate in China will take on increasing importance as China continues its economic growth journey, despite recent economic difficulties and geopolitical issues.