CBRE releases 2013 Q2 China Real Estate Market Review and Outlook
CBRE releases 2013 Q2 China Real Estate Market Review and Outlook
July 11, 2013
Office Supply Hit Record High and Retail Market Started to Diverge
July 11th, 2013, Beijing — CBRE Group, Inc. (CBRE) today released its 2013 Q2 China Real Estate Market Review and Outlook. A number of office markets reported record high new supplies in Q2 2013. Coupled with subdued demand amid slow domestic economic growth, all regions saw escalating office vacancy rate, particularly in Western China. Retail market remained stable during the quarter with many markets showing satisfactory pre-lease performance whilst a diverging trend of retail operation across cities started to emerge. For residential market, the diminishing impacts of „Five Policies and Measures‟ along with a rebound in the land market led to a stable high-end residential market in Q2 2013. Industrial market maintained its steady upward trajectory nationwide, and development of self-use warehouse by e-commerce giants as a trend became much clearer.
Frank Chen, Executive Director, Head of CBRE Research, China, comments that “in line with what we predicted in our recent white paper China Offices: Reality Check, as the supply peak in China office market starts to come, we anticipate that a number of tier-2 cities will see soaring vacancy rate and increasing pressures on rental in near term. In contrast, Blue Chip offices continued to outperform the overall market. Having said that, we believe there will still be opportunities as long as local governments, developers, tenants, and investors can provide rational responses to the current circumstances and adjust their strategies accordingly.”
In Q2 2013, China office supply hit a new high, amounting to 1.63 million sq. m, of which, nearly 80% came from tier-2 cities. Western and Central China registered a total 830,000 sq.m new office space, also representing a record high in its history. The substantial increase in supply compounded with subdued office leasing demand, drove the vacancy rate in cities like Chengdu up to a record high.
The market sees an immediate adjustment in office rents, the substantial supply did put pressures on overall rental growth: Beijing‟s office rents which witnessed continued growth for the past three years ended up flat this quarter. In Shanghai, market activities have been dominated by renewal of existing leases and relocations, as most MNCs decide to hold their expansion plan in an uncertain economic outlook. As a result, Shanghai office rental edged down for a consecutive fourth quarter. From a regional perspective, office rental declined in Western China market, but remained flat in North and Eastern China. The office market in Southern China saw a mild growth thanks to relatively resilient market demand.
Despite the pressure of increasing supply in Q2 2103, high quality office buildings maintained satisfactory performance. For example, a Japanese company and a Chinese local financial institution took 2,250 sq. m and 1,500 sq. m office space respectively in a high quality office building in Tianhe District, Guangzhou. Even in Chengdu, a high quality office launched recently in CBD demonstrated outstanding performance by attracting a local financial company to lease a whole floor of 1,900 sq. m. Another high quality strata-sale office located in Tianfu new area of significant future pipeline has sold multiple floors to self-use buyers.
The retail market remained stable in Q2 2103. Among the 15 cities CBRE tracked, only Beijing, Dalian, Hangzhou, Ningbo and Chengdu reported new supply in this quarter, adding a total of 500,000 sq. m retail space into the market, a decline of nearly 60% quarter on quarter. All of the new retail projects achieved satisfactory occupancy rate upon commencement thanks to a strong pre-leasing momentum. For example, Dalian Wanda Plaza, situated in the emerging area was almost at full occupancy upon opening. Nationwide, retail vacancy rate remained largely flat by 0.1% at 9.3%, and rental edged up 0.7% q-o-q.
As the retail market becoming more mature and with more projects in the pipeline, the expansion strategies of different brands as well as the segmentation strategies of different retail properties started to diverge. Despite the continued openings of new flagship stores in cities such as Shenyang, Shanghai, and Chengdu, the pace of luxury brands‟ expansion has slowed down markedly. Tenants from fast fashion brands, designer brands, supermarkets, and catering services have increasingly become major demand drivers for retail space.
While most retailers remained their positive outlook towards the domestic consumption, CBRE has observed some isolated cases of shopping malls that chose to withdraw from the market due to mismanagement, or to close temporarily for redecoration and repositioning, or to outsource their asset management to external experienced retail operators. For instance, in Shenyang, the Isetan Department Store had completely withdrawn from the market, and Hualian Shopping Center in Jinlang commercial hub was closed for renovation and repositioning. Furthermore, in emerging areas in some selective tier-2 cities with abundant new supply, more and more landlords have started lowering the rents or offering decoration subsides.
In view of the fact that most new retail projects can still manage to achieve satisfactory pre-lease rate, CBRE anticipates the retail market to maintain a mild upward trend in the near term. However, with more new deliveries in the coming quarters, overall vacancy rate is expected to go up and rental growth to decelerate.
Since the “Five Policies and Measures” was implemented, investment demand in residential market was further restricted. As a result, both transaction volume and price of high-end residential properties remained stable this quarter. In spite of the continued tightening measures, developers seemed to remain optimistic in the outlook of housing market. This was evident in the recent rebound in the land market rebound in major cities. According to CBRE, hot land market also reflected the improvement in developers‟ liquidity as well as the increasing scarcity of urban lands in core areas.
Developers have been aggressive in bidding for land plots in Beijing, Shanghai and Guangzhou and other key gateway cities, resulting in new records in land prices. The rising land price has, to a large extent, lifted the price expectation of home buyers. As such, CBRE says the housing price is less unlikely to correct in the near term. On the other hand, it is believed that the “Five Policies and Measures” has signaled that the government is likely to step in again if there is a sign of rapid price growth. Hence, the scenario of stable price growth with healthy transaction volume is more likely in the near term.
Industrial market has maintained a steady upward trend in Q2 2013. Except Tianjin, where logistics rent declined marginally for the first time in three years due mainly to the slowdown in export demand, rents of the quality logistics properties across other cities tracked saw no downward trend - either remained flat or registered a moderate increase.
The trend that more and more e-commerce companies started or planned to build warehouse for self-use becomes the new focus of logistics market. Leading e-commerce enterprises such as JD.com Alibaba and Amazon had begun building self-used warehouses or acquiring build-to-suit facilities aiming to control their cost and optimize their operation. In Northern China, Amazon, JD.com, Vancl, and Yihaodian have moved out from Beijing to surrounding satellite cities such as Langfang and Wuqing. Meanwhile, their strategies are shifting from pure leasing to partially leasing and partially self-owned. In Southern China, the 170,000 sq. m customized warehouse for Amazon was delivered in Huangpu, Guangzhou, in Q2 2013, covering the markets of Guangzhou, Shenzhen, Dongguan, Foshan, and Zhongshan.
In CBRE‟s opinion, the rising trend of owner-occupation for major e-commerce enterprises is that it will have a certain impact on the growth of logistics facilities‟ leasing demand. However, on the other hand, most small- to medium-size e-commerce enterprises will continue to rent warehouses since it is less likely for such companies to build their own facilities given the complexity, specialization, the capital requirement and a long investment return period for such projects.
In summary, CBRE believes the under supply situation for quality warehouse will continue in the future and the market will remain its steady upward trend, considering the rising demand from manufacturers, traditional retailers, and third-party logistics, as well as the scarcity of logistics lands.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world‟s largest commercial real estate services and investment firm (in terms of 2012 revenue). The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.