Investment According to CBRE Marketscore
January 13th, 2014, Beijing — CBRE Group, the world's leading commercial real estate services and investment firm, today released “MarketScore: The Key to Investing in China - Offices”, the first in a series of reports evaluating real estate investment potential in 15 major cities in China.
China has emerged as an important investment destination for global real estate investors due to its rapid economic growth and growing strategic importance as the world’s second largest economy. However, economic and social development varies significantly across different Chinese cities and it can therefore be challenging for investors to choose where to invest and what to buy.
To help investors cut through this complexity, CBRE has developed the MarketScore system, a strategic framework to evaluate real estate investment potential across 15 major Chinese cities in the office, retail and industrial sectors, according to their risks and returns. The scoring exercise aims to identify the most attractive real estate market from an investor perspective, based on the fundamental drivers in each sector.
Part I of the MarketScore report, released today, focuses on the office sector. Subsequent reports will examine the retail and industrial sectors.
Tier 1 Cities Remain the Preferred Destination for Office Investment
In the office market, Tier I cities generally rank higher, with Beijing and Shanghai topping the list. In general, Tier I cities are expected to deliver stable returns with a low level of risk, underpinned by a well-developed market and resilient demand from foreign and domestic occupiers. The key challenge for most Tier I cities is aggressive pricing, as net yields for office investments in these cities range from 4% to 5%, according to data compiled by CBRE Research.
Tier II cities face different challenges such as a high vacancy rate, abundant new supply and a lack of market depth. However, these issues do not necessarily rule out opportunities in Tier II cities. As most such markets are still at an early stage of development, Tier II cities generally offer better return prospects due to a low base effect and more attractive investment yields. Among Tier II cities, Wuhan stands out as a particularly attractive location for investment due to policy support from the central government combined with its strategic and geographical location. In contrast, several Tier II cities that have attracted attention in recent years, such as Chongqing and Tianjin, ranked at the lower end of the MarketScore system.
City Highlights
Beijing topped the MarketScore ranking of office markets in China due mainly to its strong historical rental performance, low vacancy rate and limited future supply. However, the rapid rental growth recorded in recent years is of increasing concern, with office occupancy costs in Financial Street and the CBD now among the most expensive in the world. Nevertheless, as the nation’s capital, Beijing remains the preferred destination for most State-owned Enterprises and numerous multinational corporations. Resilient demand and tight supply suggests that rents in Beijing will likely hold up well in the coming years.
Shanghai placed second in the MarketScore ranking. The city performed well in the risk category due it having strong net take-up and the highest investment liquidity. As the country’s financial centre, Shanghai has attracted a large number of multinational corporations, with 491 of the Fortune 500 now operating an office in the city. The inauguration of China’s first Free Trade Zone in October 2013 is set to further cement Shanghai’s status as the country’s financial hub. The key challenge for the Shanghai office market in the near term is the strong pipeline of new supply scheduled to be completed in 2014/15. In addition, from an investment perspective, the current yield of 4-5% is tight compared to those available in other global gateway cities.
Wuhan comes in third in the MarketScore ranking due in part to it recording the highest office CAGR growth over the past 10-years of the 15 cities surveyed. The city’s increasing importance as a regional hub in central China and rapid economic growth means it is set to see stronger office demand from both domestic companies as well as multinationals. The key challenge for Wuhan is abundant future supply, which will restrain office rental growth in the near term. However, the new supply of high-quality office buildings will redefine the city’s Grade A office market and exert a positive impact in the longer term.
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.
