July 30, 2014, Beijing – CBRE, the world's leading commercial real estate services and investment firm, today released its China Real Estate Market Q2 2014 Review.
Office demand gradually recovered with domestic occupiers topping the drivers. Fast fashion, affordable luxury and F&B brands remained active, whereas more retail operators were struggling for property facility upgrading and tenant mix adjustment amid the waves of booming e-tailing and concentrated supply. The logistics market maintained its strong momentum, and garnered broader interests from investors given its attractive yields and resilient demand. Home buyers continued wait-and-see stances, whereas a number of local governments have responded with some local fine-tunings, and a selective number of small- and medium-size banks lowered their mortgage interest rates.
Frank Chen, Executive Director, Head of CBRE Research, China, comments that “In Q2 2014, demand for office space gradually recovered, predominantly driven by domestic occupiers. Retail demand remained stable with fast fashion (FFBs), affordable luxury and F&B brands being the most active. The upward momentum for logistics rents continued into Q2 2014, but growth rate has decelerated to 0.6% q-o-q. While Q2 is traditionally a peak season for sales, the residential market remained soft as the overall credit market remained tight. Looking ahead, new supply for office and retail will remain abundant in H2 2014. Concerns on over-supply in most Tier 2 cities will further build up. On the residential sector, a number of local governments have started to partially relax or even lift the Home Purchase Restrictions. A number of domestic banks also gradually relaxed mortgage lending. Hence, we expect transaction volume to gradually recover in H2 2014. However, residential price is likely to experience some mild correction as developers accelerate their launching schedule.”
Total new office supply nation-wide amounted to 1.31 million sm in Q2 2014, up 3.5% q-o-q. Over 40% came from West China. South China’s new supply plummeted to a new low since 2013. It is noteworthy that Chengdu has reported a total of over 2.2 million sm of new supply in the past five quarters, posing severe oversupply challenges for local office market.
Demand-wise, total net absorption increased 25.3% q-o-q nationwide. Tier 2 cities outperformed Tier 1 cities with a 30.8% q-o-q increase in office demand. Domestic companies, particularly newly established financial SMEs, were the key drivers for net absorption. Generally speaking, MNCs remained cautious about expansion, but a number of foreign banks continued to set up new branches in Tier 2 cities. With improving infrastructure, a maturing business environment and more high quality buildings delivered over recent years, new CBDs in a number of cities started to attract relocation/upgrading demand from old CBDs. A wider option, competitive rents and possible subsidies from local governments also help to drive the trend of relocation to new CBDs. Guangzhou’s Pearl River New City, Beijing’s Wangjing precinct and Chongqing’s Jiangbeizui CBD all underpinned the development of this trend. On the other hand, traditional CBDs in a number of Tier 2 cities also welcomed the arrival of high-quality office projects in recent quarters, providing options for the upgrading demands of quality tenants. Sector-wise, finance and business services remained the key demand drivers. Non-traditional financial institutions, including small-loan companies and financing guarantee firms, were most active, particularly in Tier 2 cities. Chengdu, for example, still reported active office demand from such companies despite the local government’s recent efforts to control the rapid growth of non-traditional financial companies. In addition, Shenyang, Qingdao, Nanjing and Wuxi also witnessed numerous deals involving such tenants. Moreover, IT companies gained strength in Southern China this quarter.
Thanks to resilient demand, overall vacancy rate went down 0.3 ppt to 15.6%, but there was a divergent trend between Tier 1 and Tier 2 cities. Vacancy rates in Beijing and Shanghai Pudong reached record-low levels at 2.9% and 2.1%, respectively, due to a lack of new supply. In contrast, oversupply continued to be the dominant theme in most Tier 2 cities, with the issue more pronounced in Central and West China. In spite of the growing demand in Tier 2 cities, overall vacancy rates stayed firm at 24%. Among which, the Chengdu office vacancy rate touched an all-time high of 45.1%. Dalian was the only Tier 2 city to report a vacancy rate below 10%.
The nationwide average office rents reported a mild uptick of 0.3% q-o-q, with 0.5% averaged in Tier 1 cities, and a flat trend in Tier 2 cities. Thanks to a strong performance in Pudong, Shanghai office rent increased by 1.7% q-o-q, the highest growth among all cities CBRE tracked. Office rents only slightly dropped for aged properties in Shenzhen, and remained flat in both Beijing and Guangzhou. In Tier 2 cities, intensifying competition and rising concerns over the expected massive pipeline weighed on the current market sentiment in Shenyang, Qingdao and Tianjin, which all registered consecutive rental declines in the past three quarters. Dalian, as an exception, continued to show a steady upward trend. In East China, the office market in most Tier 2 cities remained steady. Landlords in Wuxi and Hangzhou Qianjiang New City offered rent discounts to attract more tenants. All cities we covered in Central and West China are under pressure from elevated vacancy rates and future supply in the coming quarters remained abundant. Chengdu reported declines in rentals for a sixth consecutive quarter. The concentrated new supply in recent quarters has started to take a toll on the rental growth momentum in Wuhan. Chongqing’s leasing demand is anticipated to be diluted as a number of occupiers in the financial industry are likely to move into their self-occupied headquarters buildings in coming quarters. Amid rising competition from newly-delivered, high-quality office buildings, landlords of aged properties in Changsha were forced to lower rents.
Looking ahead, we anticipate office demand to remain stable. The investigation into China’s shadow banking conducted by CBRE Research showed signs of the burgeoning of atypical financial institutions and sustained growth in the near term. We thus anticipate such demand to remain a key contributor for office demand in Tier 2 cities. According to CBRE occupier survey released in May 2014, most respondents, largely MNCs, still held an optimistic view of the future growth of their China businesses in the next two or three years. Thus, demand from MNCs is expected to remain stable in the near term. Supply-wise, massive new supply and the rapidly growing stocks will impose increasing pressure on landlords. New supply in each of these cities, including Shanghai, Chengdu and Chongqing is likely to exceed 400,000 sm in 2H 2014. In an increasingly competitive market, flexible working, collaborative working and mobile working will become increasingly popular among office tenants, particularly for those in immature markets. We expect more companies to upgrade their office environments given the delivery of more premium office buildings. Meanwhile, against the backdrop of an economic slowdown, leasing costs will become more of a factor in corporate decisions concerning workspace strategy.
Prime Retail Market
The aggregate prime retail supply registered 991,000 sm in Q2 2014, a 40% drop from the 2013 quarterly average. Only 5 out of the 17 cities that CBRE tracked, namely Beijing, Shenyang, Nanjing, Chengdu and Wuhan reported new openings of shopping venues during the quarter. In addition, Chongqing also reported the re-opening of a refurbished mall with expanded floor areas. Demand remained stable with fast fashion (FFBs), affordable luxury and F&B brands being the most active. Consequently, the overall vacancy rate edged down by 0.1 ppt to 9.4%. Nation-wide retail rents reported a q-o-q growth of 0.9%.
FFBs regained expansion momentum after a quiet quarter in Q1. New entrants expedited their expansion into Tier 2 gateway cities after their debuts in Tier 1 markets. Old Navy and New Look, both opening their first China stores in Q1, gathered pace in expansion in Eastern China, launching two new shops in Suzhou and Wuxi, respectively. Meanwhile, New Look also expanded to Tier 2 cities like Shenyang and Changchun in North China. Forever 21 opened its first Central-Western China shop in Wuhan. Earlier entrants who have set up an established network turned their focus to flagship stores in Tier 1 cities, and also expedited multi-brand strategies. H&M’s largest flagship store in China opened in Shanghai, and Urban Revivo launched one in Beijing’s Sanlitun. H.E. by Mango debuted in Shanghai, launching its first brick and mortar store in China. More FFBs strengthened their B2C channels in a bid to grab a slice of the online market, and also to leverage the advantages of big data to support product design and omni-channel development. Duplicating the B2C developments by Uniqlo, GAP and Forever 21, MUJI entered into cooperation with Tmall as well. Meanwhile, Zara announced their plan to join in opening an online shop in Tmall. With a different strategy, H&M has opted to develop its self-operated e-commerce platform by the year’s end.
Although luxury brands remained cautious about expansion, there were a number of high profile new openings of large luxury shops in Tier 2 cities. On the one hand, the emergence of high-quality retail properties provided more options for luxury bands to open large shops to enhance their brand images in local markets. On the other hand, the burgeoning consumption and market potential garnered broad interest from such brands. For instance, the newly opened Chengdu IFS attracted many international retailers to open flagships and boutiques, including Louis Vuitton’s largest flagship in China, as well as Fendi and Hogan boutiques. Meanwhile, affordable luxury brands continued to fill the vacant space of mid- to high-end venues. For example, Furla and Vivienne Westwood opened their first stores in Guangzhou and Shenzhen, respectively, during the quarter. Tory Burch and Michael Kors made their respective debuts in Suzhou and Wuxi, also settling in high-end malls. Luxury brands were not passers-by during the ubiquitous e-commerce era, as Burberry also launched its B2C shop in Tmall this quarter.
In the F&B sector, high-end F&B consumption was dented by the Chinese government’s anti-corruption campaign. Most of these high-end F&B operators responded by repositioning and adopting a multi-brand strategy through the introduction of more sub-brands catering to mass markets. Besides, some fashion brands and department stores launched their own F&B brands. Teenie Weenie opened its first café in Nanjing, and Intime’s in café settled in Beijing’s Wangfujing in88. In addition, collection stores continued to gain popularity in shopping malls, and their goods varied widely from jewelry to kid’s wear.
Regardless of the sustained buoyant expansion momentum from retailers, shopping mall operators faced challenges from both e-retail and increasing supply. Consequently, retail operators proactively upgraded property facilities and adjusted tenant mix on a regular basis, whereas some were, on the opposite, struggling to do so. Notable cases of adjustment included Shanghai’s Golden Eagle Shopping Mall and the Nanjing International Center. Meanwhile, retail venue shut-down and anchor tenant exits became more common. The closure of Ito Yokado in Beijing and the exits of two anchor tenants, Central DS in Shenyang MixC and Meichen DS in Dalian Metropolis Shopping Center proved this trend. Amid the upgrading trend, increasing the number of F&B shops became a major trend. Moreover, we also observed more exhibitions and shows of different themes introduced into shopping malls. The most successful cooperative effort must have been the Claude Monet painting exhibition held in Shanghai K11, which attracted much higher foot traffic and boosted the venue’s revenues. Other similar cooperation could also be seen in more cities, such as Beijing, Guangzhou, Shenzhen, Nanjing and Chongqing.
Looking forward, new supply in H2 2014 will remain abundant. New supply in cities like Beijing, Tianjin, Chengdu and Chongqing are likely to exceed 400,000 sm in H2 2014. Supply surges and booming e-retail will continue to exert pressures on the retail sector, with more cases of department store closures expected. In response, mall operators have increased their proportion of so-called “experiential consumption” to attract shoppers. But department stores should not restrict this concept to specific tenant types such as F&B and entertainment. Rather, they need to apply themselves more broadly to encompass the environment and services offered throughout the whole sales process, an idea more precisely phrased as the “consumer experience”. Thus, optimizing their business models and expanding store networks, as well as embracing e-commerce and applying new technologies, will become more critical for department stores to turn around their underperformance and rebuild their competencies.
Industrial Logistics Market
The logistics market maintained its strong momentum into Q2 2014. The prospering integrated logistics service and supply chain providers are now generating more demand for standard warehouses across China. Among such cases, BEST Logistics, which has signed 9 contracts totaling 143,000 sm of warehousing space with GLP in February 2014, reported further expansion in Q2. While Goodman agreed to develop 22,000 sm built-to-suit facilities for BEST Logistics in Chongqing, the company also secured 18,000 sm of warehouses in GLP Qingdao Airport Logistics Park. Meanwhile, several leasing transactions were seen among other logistics providers such as Deppon, Gooday Logistics, S.F. Express and Yunda Express, in Xiamen, Ningbo, Tianjin and Suzhou, respectively. Apart from 3PLs, occupier demand from IT and related industries was also active. For example, GLP signed a 11,000 sm lease with an IT service provider at the GLP Daxing Park in Beijing and leased 13,000 sm space to a global electronic manufacturer at the GLP Waigaoqiao Park in Shanghai. In Q2, GLP also signed a master agreement of 34,000 sm with a leading smartphone manufacturer at GLP parks in six cities across China, including Shanghai, Nanjing, Zhengzhou, Chengdu, Tianjin and Guangzhou.
All four Tier 1 and a few Tier 2 cities including Hangzhou and Qingdao have introduced new policies on industrial land usage since the second half of 2013, shortening industrial land use terms and setting new guidelines to improve industrial land use efficiency and ensure investment targets. Specifically, these new rules covered aspects such as industrial land acquisition, usage transfers, the circulation of small sites, and separation disposal for surplus industrial land. We anticipate the series of new policies to further increase overall rental performance given the combination of an expectation for land price increases, continued stable demand, and industrial land scarcity. Except for a slight 0.2% drop in the Qingdao market due to the fluctuation in the Huangdao submarket, all cities that CBRE tracked recorded flat or upward rental performance. Overall, the quality warehouse rental index stabilized at 0.6% q-o-q, despite a mild contrast in growth rate. In particular, Chongqing, Shenzhen and Wuhan saw the strongest rental growth in Q2, strengthening over 1%.
The logistics sector has been the subject of increasing interest in recent years for investors. Yields and fundamentals in the sector are particularly attractive compared to the already very competitive and congested office and retail sectors and the highly regulated and oversupplied residential sector. In the investment market, APG Asset Management NV committed up to USD 650 million to e-Shang to expand its footprint in China. Yeland Investment Group Co Ltd signed MOU with Shanghai Mapletree Management on logistics and warehousing projects, expecting a total investment size of RMB 5 billion in three years. Following the recent influx of investment into the logistics market, two domestic developers, Ping An Real Estate and Vanke, both announced their debuts in the logistics sector this quarter. As a result, we expect the logistics market to continue to be an investment hotspot in China, and that land plots with strategic locations will be the key focus in terms of site selection. In addition, in order to achieve a higher plot ratio, the trend to “go vertical” in warehouse development is anticipated to become mainstream given long-lasting industrial land scarcity and the current government’s policy preferences.
During Q2 2014, a traditional peak season for residential sales, developers sped up their launch schedules. As a result, national residential sales GFA increased by 38.8% q-o-q. However, on a y-o-y basis, transaction volume in Q2 was down 9.2% as the overall credit market remained tight and market sentiment remained weak. Among the 17 cities tracked by CBRE, transaction volume in Q2 2014 declined by 16.7% y-o-y. Along with declining transaction volume, residential prices also started to slip back. According to the National Bureau of Statistics, residential prices in 55 of the 70 major cities in China declined m-o-m in Jun 2014, the most since the previous peak in December 2011. In line with sluggish residential sales, the land market rapidly cooled down as developers became more cautious. The premium to reserve price in the land market has shrunk sharply from one year ago, whereas cases of aborted land auctions were reported from time to time, even in Tier 1 cities. Unsold inventory continued to accumulate, with a number of major cities reporting an inventory level of over 24 months. In view of this, a number of local governments have responded with some local “loosening”. The most common form of “loosening” was a partial/complete relaxation of Home Purchase Restrictions (HPR). Others even restricted developers from cutting prices too deep to avoid sending a panic into the overall market. In May 2014, PBOC also issued a statement that urged domestic commercial banks to ensure sufficient liquidity to support mortgage demand for first-time home buyers. Since June, we have observed a selective number of small- to medium-sized banks lowering their mortgage interest rates. As most of these new measures were recently adopted, the impact is yet to be fully felt by market players.
Looking ahead, under the pressures of tight liquidity and financial reporting (for listed companies), we expect supply will increase as developers become more active in launching projects. To attract prospective buyers, developers will have to resort to various measures, including price cuts and down payment subsidies, etc. With the sales peak season in “Golden September, Silver October”, we expect transaction volumes will further recover in 2H 2014. Having said that, the overall outlook for the residential sector remains challenging. Unless there is a significant improvement in the overall credit market, 2014 transaction volume is likely to drop y-o-y for the first time since 2008. We expect prices in most of the 70 major cities tracked by NBS will continue to decline m-o-m.
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.