Distressed sales made up more than a fifth of Chinese commercial real estate deals in 2023, underscoring the severity of the property crisis in Asia's largest economy.
Overall sales of offices, factories, stores, hotels, apartments, senior housing and other commercial properties in China totaled $38.6 billion last year, down from $60.3 billion as recently as 2021, according to MSCI Real Assets.
Distressed sales, those involving properties put into receivership, accounted for more than 20% of commercial real estate deals in 2023, the highest proportion since MSCI began tracking such data in 2019. Distressed deals accounted for 11% of transactions in 2022 and 9% in 2019.
Benjamin Chow, head of real estate research in Asia for MSCI, said the 20% figure "is quite a significant proportion," noting that some non-distressed deals were made by stressed developers in need of liquidity. Nearly 50% of the distressed deals in 2023 were in the industrial sector.
Distressed deals also have made up a high proportion of Chinese commercial real estate sales this year. Of 9.8 billion yuan ($1.4 billion) in total transactions, 3 billion yuan came from distressed sales in the first two months, according to MSCI. Most of the sales were smaller deals of $50 million and under.
Some investors have been encouraged by the growing percentage of distressed deals, reckoning that such activity could be a sign the commercial real estate market is beginning to bottom out.
Developers who generate cash through disposals could improve their capital structure and their creditworthiness, boosting the confidence of fixed-income investors, said Jenny Zeng, chief investment officer for Asia fixed income at Allianz Global Investors.
Government-backed entities and insurers were active buyers of Chinese commercial real estate last year. In the first quarter of 2023, a science park in Tianjin owned by defaulted developer Wanhe Technology was sold for 2.8 billion yuan to Tianjin Hongda Technology Innovation Industry Development, a government-owned entity.
The biggest distressed commercial property deal by value last year was the sale of the Sheraton Shanghai Hongkou Hotel for 1.6 billion yuan to Jinfeng Group, a cement producer based in Jiangsu province, adjacent to Shanghai.
