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  • Leasing and Investment Activity in China Commercial Property Sector Poised to Strong Rebound

Leasing and Investment Activity in China Commercial Property Sector Poised to Strong Rebound

Shanghai | February 10, 2021
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China's success in containing the pandemic has made the country the world’s only major economy to report growth in 2020. China is still set to lead the global economic recovery in 2021 with GDP forecasted to rise 8.2%, while rebound in commercial property leasing and investment activity across office, retail and logistics sectors will accelerate, according to CBRE’s  2021China Real Estate Market Outlook.

 “With the ‘dual circulation’ strategy at the center of China’s development plan over the next five years, domestic consumption and technological innovation will be increasingly important drivers of growth,” said Sam Xie, Head of Research, CBRE China. “The recent signing of the Regional Comprehensive Economic Partnership (RCEP) also plays a key role in facilitating the ‘opening-up’ policy, as the removal of trade barriers and reduced business costs will help spur growth in manufacturing, trading, consumption and logistics in 2021 and beyond.”

Office: Technology and Finance Companies to Drive Demand

Despite the mass adoption of remote working following the onset of the pandemic, CBRE’s Asia Pacific Occupier Flash Survey found that employers in Mainland China still believe that the workplace offers considerable advantages in terms of fostering innovation, employee engagement and team productivity. However, the role, location, configuration and appearance of the office will be reshaped, leading to an overarching focus on agility.

CBRE expects nationwide office net absorption to rise 60% y-o-y in 2021 as the swift economic recovery continues to enhance business confidence. The TMT and finance sector, which together accounted for 55% of the leased space in 2020, will still dominate net absorption in 2021 underpinned by rapid expansion of employment.

Total new supply across 18 major Chinese cities is projected to reach a historical high of 9.6 million sq. m. in 2021. Abundant new supply in non-core areas will support decentralization by cost-sensitive tenants particularly in manufacturing and transportation & logistics.

Meanwhile, CBRE expects finance and business service companies to speed up upgrading and expansion following rental declines in core CBDs of major cities in 2020. The availability of space in core CBD is set to tighten and the vacancy will decrease gradually after peaking in 2021. Vacancy in core CBDs in Tier I cities is expected to fall below 10% in 2022, a level capable of supporting steady rental growth.

Retail: Market to Regain Growth Momentum

CBRE expects China’s total retail sales growth to reach double digits in 2021 on the back of strong signs of economic revival and improved consumer sentiment. While omni-channel strategy is widely seen as key to boosting sales momentum, retailers that respond to the rise of Happiness & Health lifestyle, particular in sectors such as cosmetics, sports, toys, and pet products are expected to record higher growth in physical store sales.

New shopping mall supply in China’s 18 major cities is estimated to reach 8 million sq. m. in 2021. CBRE expects vacancy rates to stabilize in 2021, followed by a gradual decline in coming years. As supply and demand rebalances, shopping mall ground floor rents are expected to rise slightly in 2021 and then recover to pre-pandemic levels in 2022. CBRE recommends landlords adopt proactive strategies in five key areas including environment and wellness, diversification and efficient space utilization, new approaches to charging rent, rebalancing tenant mix, and augmenting infrastructure and amenities.

Logistics: Demand to Recover Faster than Expected

Nationwide net absorption of prime logistics warehouses is likely to increase by 30-50% y-o-y in 2021, supported by robust growth of structural demand drivers such as E-commerce, third-party logistics, and cold chain as well as a cyclical upturn of optional consumption drivers. Tier I and satellite cities are expected to continue to lead rental growth, driving an overall increase of rents nationwide.

Approximately 15 million sq. m. of new space across 19 major cities will be delivered from 2021 to 2023, with half of the supply coming onto stream this year. Compared to the 2018-2020 period, prime logistics supply and demand conditions are expected to rebalance over the next three years as greater supply in tier I cities will help boost availability, while a slowdown in new completions in many tier II markets will ease oversupply.

For occupiers, 2021 will be an optimal period for new leases and expansion. There will be opportunities to upgrade to Grade A warehouses to improve efficiency or sign longer leases at attractive rates. CBRE suggests landlords adjust rent expectations and acquisition strategy to align with local market conditions. In balanced or tenant-favoured markets such as Tianjin and Ningbo where short-term new supply outpaces growth of demand, landlords are advised to attract high growth tenants with flexible leasing strategies. Meanwhile, landlords in competitive markets such as Hangzhou and Wuxi should consider land and assets acquisition, and stay vigilant for signs of a rental acceleration.

Investment: Transaction Volume to Grow by 15-20%

CBRE’s 2021 China Investor Intentions Survey uncovered around 57% of respondents intend to “buy more” real estate in 2021, the highest percentage since the survey began in 2016. CBRE expects commercial real estate investment volume in Mainland China to increase by 15-20% y-o-y this year amid upbeat market sentiment and significant volume of liquidity.

Between 2016 and 2018, major domestic and foreign real estate funds’ (including trusts) cumulative investment in Chinese commercial real estate totaled nearly 180 billion yuan. Based on historical acquisition costs, just 10% of this investment has been disposed of thus far. Asset availability is expected to rise in 2021 due to impending fund expires and overleveraged domestic developer’s intentions to offload properties to comply with the “three red lines” regulations.

Investors’ preferences over income stability and growth are fueling stronger interest in structural opportunities benefiting from the “dual circulation” strategy, such as logistics properties, business parks, data centers, and cold storage facilities. Meanwhile, Grade A office buildings in gateway cities that provide stable cash flows present opportunities for buyers to benefit from expected rental growth and yield compression in a cyclical recovery. CBRE also advises investors with operational expertise to focus on regional shopping malls or those with a strong population catchment in tier I and tier II cities to tap counter-cyclical opportunities.

Disclaimer:

Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is a worldwide commercial real estate services and investment firm. The company has more than 100,000 employees serving clients in more than 100 countries and regions. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.

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