CBRE Releases 2013 Q3 China Real Estate Market Review and Outlook
CBRE Releases 2013 Q3 China Real Estate Market Review and Outlook
October 15, 2013
Competition in Retail Market Intensified and Logistics Sector Strengthened Further
October 15, 2013, Beijing —CBRE Group, Inc. (CBRE) today released its Q3 2013 China Real Estate Market Review and Outlook. The supply of Q3 2013 office market remained at a high level despite a decline from last quarter. As market conditions continued to stabilize, the quarterly net absorption rebounded and the average vacancy rate leveled out, while the retail market witnessed a nationwide supply peak. Most new deliveries achieved a satisfactory occupancy rate at opening and market momentum maintained stable. The land market heated up with no new policy measures announced during the quarter, further lifting house price expectations. The average price of luxury apartments continued to record a slight uptick as a consequence, while the logistics market remained robust and buoyant as market demand continued to outpace supply.
Frank Chen, Executive Director, Head of CBRE Research, China, comments that “Competition in the retail sector has intensified as the new supply surges, imposing increasing challenges on existing projects. Mid-range department stores are now facing mounting operational challenges under the dual pressures of the shopping mall and increasing popularity of e-commerce. Cases of operational failure and withdrawal among retail properties will likely become more common. Experiential consumption or one-stop shopping is the most essential strategic adjustment to accommodate the online shopping boom. In addition, to improve their competitiveness, landlords are likely to introduce professional retail asset management, differentiate through the launch of new brands and/or undergo tenant-mix adjustments.”
In Q3 2013, the national new supply of office buildings amounted to 1,005,000 sm, down 40% from last quarter, with roughly 80% of the total from Tier-2 cities. New supply in western and central China topped the other regions, adding a total of 417,000 sm office space. Despite the high level of new supply, the rebound of accumulated net absorption in Q3 resulted in a flattening overall vacancy rate. Among the submarkets, east, south and central China witnessed vacancy rate declines while vacancies increased in north and west China.
The steady demand drove the overall rent level slightly upward, up 0.2% q-o-q. Thanks to a pick-up in leasing demand, office rent in south China posted a 1% q-o-q growth. In Shenzhen, the reform of business registration and Qianhai’s tax preferential policy continued to stimulate office leasing activities, mainly from business service, finance and logistics industries.
This buoyant momentum led to a 1.9% q-o-q rental increase with a new quarterly net absorption record since Q3 2012, making Shenzhen the clear national outperformer among the cities CBRE tracked. Demand in east China remained stable, leading to a modest uptick of average rent. Foreign MNCs became more cautious in expansion or upgrade.
In western and central China, domestic companies continued to be the major driver of office take-up. In Chengdu, quarterly net take-up grew steadily as the relocation and upgrading demands gradually picked up. Rental performance in these regions was still subdued due to the high vacancy rates and the large pipeline. Some landlords continued to employ strategies such as price cutting or rent-free period extension to improve occupancy, resulting in a market-wide rental decline in this quarter. Average rents of north China cities held flat save for Shenyang, which recorded a modest decline as pressure from substantial future supply looms.
Future supply will still be substantial in the coming 6 months, especially in Tier-2 cities like Chengdu and Shenyang. The near-term oversupply anticipation will impose further upward pressure on vacancy rates of Tier 2 cities. The balance of pricing power is likely to further shift to the tenant side in cities with stock levels surging, such as Chengdu, Chongqing, Hangzhou and Tianjin. Despite this, CBRE believes Blue Chip offices, Grade A property with top quality and primary location, in these cities will perform well due to relative scarcity and their premium qualities.
Q3 2013 saw a peak in retail supply. Save for Ningbo and Dalian, each of the 16 cities CBRE tracked reported new delivery, with around 80% of the total coming from Tier-2 cities. The quarterly new retail supply accumulated about 2.2 million sm nationwide, up 273.7% on previous quarter. New retail projects in cities such as Shanghai, Wuhan, Chengdu, Wuxi, Hangzhou and Shenyang, achieved satisfactory occupancy upon commencement. Some properties developed and operated by experienced retail developers hit from 90% to almost full occupancy upon opening. As a result, despite a supply surge, the average vacancy rate registered a modest rise of 1 ppt to 10.4%. The nationwide average ground floor rent of high quality retail properties edged up 0.4% q-o-q.
The competition in the retail sector intensified as new supply surged, imposing significant challenges on existing projects. In Q3 2013, we observed a shopping mall closure in Tianjin, in addition to several cases of proactive tenant-mix adjustments across the nation. The Tianjin project shut down despite its recent repositioning. Moreover, mid-range department stores are now facing mounting operational challenges under the dual pressures of shopping mall and increasing popularity of e-commerce. More cases of department store withdrawal were reported. In recent quarters, Grandbuy has exited the Shenzhen, Chengdu and Wuhan markets. After a number of store closures in Shenyang, New-mart Plaza Shenyang Taiyuan Road store was shut down in Q3 2013. Meanwhile, Réel Department Store, the anchor tenant of the MixC Shenzhen, expired and failed to renew.
Luxury brands further slowed down their expansion plans. Their focus has switched to the opening of flagship stores in gateway cities, the upgrading of existing branches, the enhancement of the shopping experience, and the further developing brand loyalty. In Q3 2013, cities including Beijing, Shanghai, Tianjin and Wuxi witnessed such practices among luxury brands including Bottega Veneta, Burberry, and Givenchy. Meanwhile, fast fashion brands such as Uniqlo were still tapping into Tier-2 cities whist securing flagships in Tier-1 cities.
Cases of operational failure and withdrawal from retail properties are anticipated to occur more often in some cities of escalating future supply. In such cities, the significant inventories and substantial pipelines will therefore cap rental growth or even trigger a negative rent performance. Experiential consumption or one-stop shopping is the most essential strategic adjustment to accommodate the online shopping boom. In addition, to improve their competitiveness, landlords are likely to introduce professional retail asset management, differentiate through the launch of new brands and/or undergo tenant-mix adjustments.
Industrial Logistics Market
The logistics market was buoyant in Q3 2013. Supply of quality logistics space remained tight in most cities except a few Tier-2 cities including Chengdu and Wuhan. In Guangzhou, lettable space from a few termination leases due to business adjustments and the upcoming Amazon relocation to its built-to-suit distribution center stirred market interest amid the long lasting supply shortage. Driven by robust demand, market average vacancies of major markets remained at extremely low levels, with standard warehouses in Beijing, west Shanghai and some of the Tier-2 cities reaching near-full occupancy. E-commerce and 3PLs continued to be the dominant demand driver in this quarter.
Rents continued to reach new highs amid the supply shortage while the average rents of standard logistics warehouse were flat or grew in most markets in this quarter. Shanghai, Hangzhou, Tianjin and Guangzhou all recorded quarter-on-quarter rental growth of around 2.0%. In Q3, the continuing strong performance and positive outlook of the logistics market drew wider attention from domestic and foreign investors, instances including the partial share acquisition of Shanghai Yupei group’s logistics properties by a foreign investor. Meanwhile, foreign logistics developers such as GLP were continuing to extend their expansion plans into China Tier-2 cities including Wuhan, Chongqing, Hangzhou, Nanjing, Tianjin, and others.
The scheduled completion of standard warehouses and built-to-suit warehouses developed by e-commerce players are anticipated to partly relieve the tight supply. With the e-commerce boom and the continued shift of manufacturing activities to inland cities, CBRE anticipates the demand for quality warehouse to stay steady. The launch of the pilot Free Trade Zone in Shanghai is expected to promote business activities, particularly in industries like trade, logistics and shipping, and therefore drive demand for the industrial market.
Luxury Residential Market
In Q3 2013, there was no tightening measure to further strengthen controls on the property market. The supply of luxury apartments remained stable over last quarter, and the new launch of luxury residential pre-sale units in Shanghai hit a year high. Transaction volumes declined in July and August, due to seasonal reasons, and rebounded in September. The continuing restrictive measures on home buying curbed investment demand to a large extent, while upgrade demand remained the major drive of luxury residential. Cities including Beijing, Shenyang and Wuhan recorded sales volume growth from previous quarter. In the land sales market, several cities reported record-high prices this quarter as a few cities have launched land plots in prime locations. The rising land price hence lifted the market’s price outlook, and consequently led to a slight uptick of the nationwide average price. Particularly, Beijing registered a 5.9% q-o-q increase of luxury apartment price in this quarter, marked a new high in three years.
As the traditional high season for residential sales, and along with some cities scheduled to host housing fairs in October, CBRE anticipates more upgrading demand in the fourth quarter. The possibility of the extension of property taxes into new regions and cities increases the future price expectation, and is likely to expedite part of the demand from first home buyers and upgraders, continuing to add pressure on the price of luxury residential market.
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.