CBRE Releases China Real Estate Market Q1 2014 Review
CBRE Releases China Real Estate Market Q1 2014 Review
April 16, 2014
Office and Retail Supply Decline, Home Price Growth Slows
April 16, 2014, Beijing – Recently, CBRE, the world's leading commercial real estate services and investment firm, released its China Real Estate Market Q1 2014 Review.
Nationwide, new supply of both office and retail properties declined sharply in Q1 2014. Driven by the buoyant demand from domestic companies and non-traditional financial institutions, office net take-ups rebounded in this quarter. In the retail sector, more international brands entered China. Furthermore, retailers increasingly adopted a multi-brand strategy to increase market penetration. In order to attract foot traffic, mall operators have been increasing the proportion of experiential-type retailers, including F&Bs. Demand for logistics facilities remained robust, mainly from 3PLs and e-tailers. Logistics developers pushed forward strategic cooperation with anchor tenants in establishing a national logistics network. But due to seasonal effect and credit-tightening, both supply and sales of the luxury residential property declined along with contracting price growth.
Frank Chen, Executive Director, Head of CBRE Research, China, comments that “Looking ahead, office and retail supply will remain abundant in 2014, and the divergence in performance between Tier 1 and Tier 2 cities should continue. Thanks to resilient demand, we expect office rent will remain steady in Tier 1 cities. Sustained retail consumption and a mature commercial environment make Tier 1 cities the forefront for new brands to make their debuts in China. In contrast, massive office and retail supply in Tier 2 cities continues to add pressure on those markets. Hence, we expect to see increasing vacancy and weak rental growth in most Tier 2 cities. In the long run, the high quality offering of new projects will certainly reshape the landscape of the local office market and trigger upgrading demand from both MNCs and large domestic occupiers.”
Total new office supply nationwide amounted to 1,265,000 sm in Q1 2014, down 33.9% q-o-q. West China and Central China each contributed approximately 30% of the new supply. All cities in North China, on the other hand, reported no new supply during the quarter save for Tianjin. During the quarter, we observed a mild recovery in office demand across most of the markets, resulting in a 4.4% q-o-q growth of net absorption. Domestic companies remained the key driver, whereas MNCs remained cautious about expansion. Relocations and renewals were the major market activities in Tier 1 cities. In Shenzhen, with lingering impact from business registration reform and further development of the Qianhai Co-operation Zone, the city witnessed substantial leasing transaction deals from newly established SMEs in this quarter. Meanwhile, in Tier 2 cities, increasing supply of high-specification office buildings triggered the release of upgrading demand. Sector-wise, finance remained the key demand driver, in particular in Tier 2 cities where atypical financial institutions such as small-loan companies were most active. Overall vacancy rate stayed flat at 15.8% as at end of Q1 2014.
The nationwide average office rent remained flat in Q1 2014. In general, Tier 1 cities outperformed their Tier 2 peers, with each Tier 1 city reporting a mild uptick. The average vacancy rate in Shanghai Lujiazui Precinct hit a historic low, adding more upward pressures on rental growth. On the other hand, Tier 2 cities showed considerable divergences. Thanks to recovering demand, a number of Tier 2 cities in East China reported decent gains in rental growth during the quarter. Suzhou stood out to register a q-o-q growth of 3.2%, driven by the buoyant activities from financial institutions. Moving to Central China, obsolete buildings faced intensifying competitions in the face of a new supply surge in Changsha, and strata-titled landlords have been losing their negotiation power. Despite a lack of new supply in North China in Q1, the already high vacancy rates and sluggish demand took a toll on the rental growth momentum. Every Tier 2 city in this region except Dalian reported rental declines. In West China, Chengdu vacancy rate further climbed to a record high 43.9% by Q1, and consequently the rental decline widened to 2.3%, the sharpest decline nation-wide.
CBRE anticipates the office pipeline to remain abundant in 2014, particularly in West China. Overall vacancy in West China will remain elevated, exerting more downward pressures on office rental. CBRE expects to see resilient demand and steady mild rental growth in Tier 1 cities. In the remaining three quarters, we expect increasing supply of high quality office space in Shenzhen and Shanghai, which should provide an opportunity for tenants to consolidate or expand their real estate portfolio. Admittedly, the glut of new office supply in Tier 2 cities will cap rental growth in coming quarters, whereas the high quality offering will certainly reshape the landscape of the local office market and trigger upgrading demand from both MNCs and large domestic occupiers. .
Prime Retail Market
The aggregate prime retail supply plummeted to 595,000 sm in Q1 2014, a new low since Q2 2010. With no new supply in North and Central China in this quarter, only 6 out of 17 cities CBRE tracked, namely Chengdu, Shenzhen, Ningbo, Chongqing, Suzhou and Hangzhou reported new openings of shopping venues. Some developers held off the opening due to a lower-than-expected pre-commitment rate, which was part of the reason for the supply drop in this quarter. Overall vacancy rate edged down by 0.5 ppt to 9.5%. A number of cities such as Shenyang reported rental decline due to over-supply and intensifying competition. Nonetheless, the nation-wide retail rent reported a q-o-q growth of 0.9%.
In spite of the limited new supply in this quarter, international retailers remained keen in the China retail market. A growing number of new entrants entered the China market in Q1, with Tier 1 cities as the preferred destination, whilst some existing brands further expanded in Tier 1/2 cities. Increasing supply of prime retail venues in Tier 2 cities provided more options for luxury brands to open flagship stores. During Q1, Prada launched two flagship stores in Chengdu and Chongqing. Lane Crawford also made its debut in West China after its return to Shanghai in late 2013. Moreover, affordable luxury brands, such as MCM, continued to expand rapidly in Tier 2 cites. Fast fashion brands (FFBs) also expedited their multi-brand strategies by introducing more sub-brands to increase market penetration. During the quarter, New Look, a UK FFB opened its first shops in Beijing, Shanghai and Hangzhou at the same time, while Old Navy, owned by GAP, debuted in Shanghai.
With retailers introducing more sub-brands and intensifying competition, China’s retail market is becoming more segmented. We have seen more and more retailers, including luxury, fast fashion and sports brands, launching their kids-wear brands. A number of F&B brands also offered multi-brand shops in one shopping mall, catering to different clientele. In response to rapid development of e-tailing, more and more traditional mall operators are embracing the idea of omni-channel. The recent tie-up between Intime Retail and Alibaba is further proof of the trend.
In an increasingly competitive environment, mall operators found it difficult to turn around underperforming shopping malls and cases of mall closure were reported from time to time. On the tenant side, some reputable brands had to shut down some shops due to weak sales performance. In order to attract or retain high-quality retailers, some malls offered to cut rent or even change to turnover-based rent. In addition to increasing the proportion of F&B, more experiential stores were opened in recent quarters. Nonetheless, Apple opened its fourth store in China Central Mall in Beijing, and had announced plans to open new stores in Tier 2 cities, such as Chongqing and Wuxi.
Despite a drop in Q1, new supply in 2014 will remain abundant. With a rapidly changing landscape of a more segmented retail market in China, we expect more retailers of different specializations to join in the multi-brand strategy, and shift their focus to Tier 2/3 markets. Operators’ experience in market positioning, leasing and tenant mix will become more critical in the success of a new shopping mall. Consequently, performance between experienced and inexperienced operators will further diverge.
Industrial Logistics Market
The logistics market was brisk in Q1 2014, driven by robust demand from 3PL providers and e-tailers. For instance, Best Logistics, Yunda, Sankyu, etc. each entered into agreement to take up logistics spaces. At the same time, e-tailers such as VIP.com and Suning.com also reported new leasing activities. Recently, there was an increasing trend for logistics developers to cooperate with their anchor tenants to establish a national network of logistics facilities in China. Generally speaking, the under-supply situation for the logistics market remained unchanged. Vacated space due to expired leases in a number of cities was quickly absorbed by pent-up demand.
Demand in East and West China were much more robust among all regions. The establishment of Shanghai Free Trade Zone continued to drive the Shanghai logistics market. Average vacancy rate of Shanghai logistics market declined and the overall rent increased by 5.2% q-o-q, the highest among cities that CBRE tracked. In the meantime, Zhejiang Province announced plan to propel e-commerce development. Hangzhou proposed the establishment of an “Online Free Trade Zone”, while Ningbo commenced construction of E-commerce City. Both cities reported a q-o-q rental growth exceeding 2.0%. Another hotspot came from West China. Manufacturers and 3PLs remained the key drivers in this region, and the overall rent increased by 1.9% q-o-q. Key events in West China included an e-commerce enterprise taking up some logistics space at GLP Chengdu Hi-Tech Logistics Park and Goodman being appointed to develop a BTS logistics facility in Chongqing on behalf of Yunda. Thanks to the robust demand, the nation-wide logistics index posted 1.2% q-o-q growth, with no city reporting rental decrease.
Looking forward, we expect demand for logistics facilities to remain buoyant, with increasing demand for BTS facilities. While supply is set to increase in coming quarters, the market dynamics will remain as landlord-favored with a low vacancy level and an upward rental trend. Shanghai government recently announced new regulations to increase the efficiency of industrial land usage, in which the lease period for industrial land will be changed from a fixed 50-year term to a flexible term from 20 years onwards. This to some extent has reinforced market expectations of rising industrial land prices.
Luxury Residential Market
The first quarter is the traditional off-peak season for the residential market. Furthermore, credit remained tight in most major cities, with first-home mortgage rate set at a premium against the benchmark rate. Some banks even suspended lending to second-home mortgages. A number of cities fine-tuned local implementation measures to cool down the residential market, such as tightening restrictions of borrowing from Housing Provident Fund. Differentiated credit policies remained the key measure in reining in speculative demand. The credit tightening also dampened market sentiment, with more potential buyers adopting a wait-and-see approach. As a result, transaction volume of luxury residential fell markedly in Q1 and upgrading demand remained the dominant driver. With the market sentiment turning cautious, home price growth narrowed down from last quarter in most cities. Ningbo stood out to report a 1.5% q-o-q decline for luxury residential prices, the largest drop among cities CBRE tracked.
In the absence of any sign of credit loosening and increasing anecdotal cases of price cuts in a number of cities, we believe market sentiment will remain weak in the near term. In Mar 2014, the central government has proposed to adopt a “two-tier policies” to control the residential market. Against this backdrop, we believe current tightening measures in major cities, in particular in cities where prices have grown rapidly in recently years, will continue. Price growth will further decelerate in coming quarters in most major cities.
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.