Chinese real estate sector at the peak of tension: a $140 billion problem

Assets increasingly difficult to sell, many investors find themselves stuck after putting billions of dollars into the Chinese real estate sector. Losses from asset sales are growing, adding pressure to a sector that is heavily impacting Asia’s largest economy.

Since the end of 2024, managers like BlackRock and Carlyle have sold commercial properties in China at prices far below purchase levels, causing losses even for banks. Other investors are considering divestments, while HSBC, Standard Chartered, and others report an increase in defaults on real estate loans. Over the past 15 years, foreign investors have poured roughly $140 billion into Chinese real estate, hoping for growing demand, but an oversupply has caused rents and values to collapse to levels seen a decade ago. Distressed sales of Chinese commercial real estate reached 114 billion yuan ($16 billion) between 2023 and 2024.

The current situation indicates that the longer owners wait to sell, the greater the losses. Estimated values of offices in Beijing and Shanghai, which attract much foreign investment, have dropped by at least 40% since 2019. Office vacancy rates in major Chinese cities are among the highest in the world, between 20% and over 40%. The economy is weakened by a deflationary environment and higher US tariffs, and experts predict it will take years before the real estate oversupply can be absorbed.

Foreign investors remain stuck with their properties. One potential exit strategy would be to sell to local buyers, such as state-owned enterprises with strong liquidity, but even they are waiting for signs of market improvement. In the past, foreign investors mainly focused on buying warehouses and storage facilities, expecting growth in e-commerce and demand from food producers and manufacturers. But now they face an oversupply. To prevent warehouses and facilities from emptying, some owners have renewed or signed new leases at rates roughly 25% lower than previous rents.

Even major distressed debt investors are facing heavy difficulties. At the end of 2021, Oaktree Capital Management LP acquired a tourist resort and an unfinished residential project from Evergrande Group, following the giant’s default on a loan of about $400 million. After taking control of the property, Oaktree resumed construction and collaborated with the local government to deliver hundreds of homes. It now manages the resort and two residential lots, aiming to sell the project and recover the loan. Completed apartments are on sale at around 4,000 yuan per square meter, less than half of the peak 2019 prices.

Another example: in Shanghai, a fund managed by Carlyle for South Korea’s National Pension Service sold the 31-story skyscraper The Crest at the end of 2024 for 826 million yuan, just over half of the 1.46 billion spent in 2015, after more than a year on the market. At the time of purchase, commercial rents in Shanghai were rising and office vacancy was 4.6%. Between 2010 and 2020, new office construction in China more than tripled compared to the previous decade. Foreign investor acquisitions peaked at nearly $20 billion in 2019, before the pandemic, which brought severe restrictions and a sharp drop in demand.

Difficult market conditions could lead to further distressed sales, with possible repercussions on the value of similar real estate assets. Even currently healthier properties may be threatened. Office rents in China are expected to continue falling until next year, with nominal building values in 2030 lower than in 2020, marking a decade of deep losses for the Chinese commercial real estate sector.