Office and Retail Supply Hit All-Time Highs, Logistics Market Remains Buoyant
January 16th, 2014, Beijing — CBRE, the world's leading commercial real estate services and investment firm, today released its China Real Estate Market Q4 2013 Review and 2014 Outlook.
Nationwide, the new supply of both office and retail properties reached a record high in Q4 2013. Along with the supply spike in the office sector, net take-up increased during the quarter, while the vacancy rate continued to rise. In the retail space, operators proactively brought in more experiential retailers, and most new projects managed to open at a satisfactory occupancy rate. Logistics markets remained robust with steady rental growth in most major markets. Despite a new round of measures from local governments, aiming to rein in rising housing prices, the impact on most markets has yet to be seen. Most of the luxury residential markets that CBRE tracked reported a stable or even slightly upward trend in Q4 2013.
Frank Chen, Executive Director, Head of CBRE Research, China, comments that “Looking ahead, most of the office and retail markets in China will face pressure, to different extents, from mounting supply in 2014. In contrast, the logistics sector will remain a landlord-driven market thanks to a continued supply shortage and growing demand. With the expectation that more long-term regulation mechanisms will be introduced in 2014, the housing market is likely to stabilize.”
Office Market
The nation-wide quarterly new supply reached all-time high in Q4 2013 with 1,767,000 sm of office space delivered, over 70% coming from Tier 2 cities. New office supply in West China alone (Chengdu and Chongqing) reached 764,000 sm, accounting for over 40% of the national total. The surge in new supply had triggered a release of potential demand, leading to a 10.6% q-o-q growth in net absorption. Finance and business service sectors remained the key demand drivers of office leasing. Driven by the relatively higher vacancy levels of recent deliveries, the average vacancy rate went up by 0.9 ppt to 15.2%.
In Q4 2013, the nationwide average office rent dropped by 0.3% q-o-q due to mounting new supply while rental performance varied across regions. In East China, there was a mild recovery in office demand, save for Shanghai. Most Tier 2 cities in the region recorded a 1-2% q-o-q rental growth during the quarter. Office market in South China remained steady. The Shenzhen market saw a 1 ppt increase in vacancy rate and a contracted rental growth due to the diminishing impact of preferential policies and the peak of small- to medium-sized leases expiry. In North China, most Tier 2 cities saw rental decline as landlords lowered their rental expectations in the face of fierce competition. In West China, Chengdu recorded a 2.1% q-o-q rental drop in Q4 on the back of supply peak and intensifying competition, while Chongqing and Wuhan’s rents remained stable.
In 2013, new office supply reached approximately 5 million sm, up 23.1% y-o-y. Chengdu topped the list with a record-breaking annual addition of 1.5 million sm. Relocations by cost-sensitive tenants, particularly from MNCs, were more common in Beijing, Shanghai and Guangzhou whereas large leases in Tier 2 cities were mainly from finance, real estates, and energy and resources companies. Domestic financial institutions were increasingly active in the office investment market, including the Bank of Communication Shenzhen Branch, which bought 50,000 sm office space in Century Place in Shenzhen, while the Bank of Communication and China Everbright Limited purchased Oriental Financial Centre in Shanghai Pudong.
We anticipate another peak year for office supply in 2014. Shanghai and Shenzhen are expected to see substantial new supply among Tier 1 cities. In a number of Tier 2 cities such as Chengdu, office supply is likely to hit another peak in 2014, adding more pressure on the already high vacancy rates and inventory levels. In particular, emerging clusters in Tier 2 cities, where most of the pipelines come from, are likely to face fiercer competition and more pressure on office rents.
Prime Retail Market
The aggregated retail new supply reached a refreshed historic record of 2,555,000 sm in Q4 2013, with around 80% of the total coming from Tier 2 cities. Wuhan, Tianjin, Chengdu and Shenyang all registered new deliveries of more than 300,000 sm. At the same time, the quarterly net absorption amounted to 2.3 million sm as landlords proactively brought in more experiential retailers while fast fashion brands continued their expansion in Tier 2 cities. As such, the overall vacancy rate edged down by 0.5 ppt q-o-q, and the average rent grew by 0.2% q-o-q nation-wide.
In 2013, while most of the new projects managed to open with satisfactory occupancy rate, a number of shopping malls in Tier 2 cities, in particular those in non-core areas, were struggling to fill space and some even had to postpone their openings. Amid the e-commerce boom and abundant new supply, retail operators began to adjust their operation strategy and introduce new initiatives.
The shifting to ‘a shopping mall paradigm’, as well as differentiation, diversification and multi-channel retailing have become buzzwords for China’s retail market in 2013. While shut-down or withdrawal of department stores was increasingly common in 2013, a number of properties responded by increasing the proportion of F&B tenants to attract more foot flows, including the recently opened Galeries Lafayette Beijing and the flagship store of Lane Crawford in Shanghai.
As an alternative differentiation strategy, a number of underperforming shopping malls in Chengdu, Chongqing and Guangzhou brought in outlets as their anchor tenant or even to replace the whole retail space. To extend customers’ shopping time and to enrich their shopping experience, shopping malls, new or old, have started to increase the proportion of experiential consumption including F&B, entertainment and kids wear precincts, while at the same time providing more ancillary facilities in public areas. After Suning and Rainbow Department Store, a growing number of brick-and-mortar retail operators, such as Wanda, Yintai and Lane Crawford, tapped into or further strengthened their exposure to O2O or omni-channel retailing in 2013, making multi-channeling another theme of the year.
In 2013, luxury brands scaled back their expansion in China and turned their focus to upgrading existing stores in core areas in Tier 1 cities, emphasizing more on shopping experience delivery and brand image congruence. On the other hand, affordable luxury brands sustained a robust pace in portfolio expansion. While securing flagship stores in core location in Tier 1 cities, fast fashion brands continued to strategically expand into Tier 2/3 cities. At the same time, an increasing number of fast fashion brands were pursuing a multi-brand strategy in China to penetrate into a broader range of market segments. In addition, the resurgence of luxury department stores, increasing popularity of design brands and collection stores, and initiatives such as pop-up stores all pointed to a more mature and diversified retail market in China.
New supply in 2014 is expected to remain high, most of it coming from Tier 2 cities. We therefore anticipate an increasingly polarized performance between landlords with/without retail operation experiences and retail properties in core/non-core areas. More cases of operation failure and repositioning are expected, while increasing pressure on rental performance will persist. A curated mix of tenants to fit the positioning, brand diversification/differentiation and professional asset management will remain the keys to successful retail operation. In addition, we expect to see more cases of brisk-and-motor retailers adapting into the digital age through multi and omni-channeling strategies.
Industrial Logistics Market
The logistic market remained brisk in Q4 2013. A number of quality logistics warehouses developed by experienced developers such as GLP were delivered in both Tier 1 and Tier 2 markets this quarter, helping relieve the supply shortage in certain markets to some extent. However, nation-wide, supply remained tight driven by the sustained robust demand from e-commerce retailers and 3PLs. As such, the logistics warehouses rental index posted a 0.5% q-o-q growth in Q4 with no rental decline recorded across the 16 cites that CBRE tracked. In particular, Wuhan, Hangzhou, Shenzhen and Guangzhou witnessed a rental growth exceeding 1%. In 2013, Hangzhou and Shenzhen reported annual rental growth of over 5%, driven by a lack of new supply as well as buoyant demand throughout the year.
We anticipate the booming e-commerce industry will continue to back the leasing and built-to-suit demand for quality logistics facilities throughout 2014. Coupled with a constraint on the industrial land supply, the steady upward trend of logistics rent is set to continue into 2014, while the average vacancy rate will remain low. The solid market fundamentals and stable investment return will continue to attract investors’ interest in this sector.
Luxury Residential Market
In Q4 2013, a number of local governments announced new measures targeting the residential market. Most of these cities increased the minimum down payment ratio for second home mortgage from 60% to 70%. On top of that, cities like Shanghai and Guangzhou further tightened restrictions on housing purchases by non-local residents by extending the required period of tax payment and social security payment. Nonetheless, most of the luxury residential markets that CBRE tracked reported a stable or even slightly upward trend in Q4 2013. Among these, residential markets in Tier 1 cities continued to perform well. In particular, Beijing reported a 4.9% q-o-q price growth in Q4.
As the central government pushed forward long-term market mechanisms such as the real estate property registration and affordable housing while local governments were committed to increase land supply, we anticipate the high-end residential market to stay stable in 2014. The sustained strong demand and limited supply of land in Tier 1 cities is likely to put upward pressure on cities like Beijing and Shanghai. In contrast, price growth will become more moderate in Tier 2 and 3 cities due to abundant supply.
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.
