CBRE Releases China Real Estate Market Review for Q1 2015
CBRE Releases China Real Estate Market Review for Q1 2015
April 21, 2015
April 27, 2015, Beijing - CBRE, the world's leading commercial real estate services and investment firm, today released its China Real Estate Market Review for Q1 2015.
New office supply reached the second highest ever quarterly total on record in Q1 2015. Shenyang, Wuxi, Changsha, Chongqing and Chengdu all reported vacancy rates of close to 40%.
The sluggish luxury spending in China in recent years has prompted a number of luxury brands to align their global prices in order to close the pricing gap between China and overseas markets. This will boost domestic luxury consumption sentiment.
CBRE believes that higher standards for industrial property development and strategic planning will become imperative. Developers and landlords will need to formulate comprehensive and holistic plans and place a stronger emphasis on operations in order to remain competitive.
A comprehensive package of new policies designed to stimulate the housing market was announced in Q1 2015. These included the lowering of the down payment ratio to 40% for second home buyers. This is expected to help boost transaction volume, especially in major cities where housing prices are relatively high and home purchasers are more likely to rely on mortgages.
Frank Chen, Executive Director, Head of CBRE Research, China, commented: “Looking ahead, the future pipeline of new office supply remains abundant across most markets. On the demand side, we expect occupiers will not only focus on cost control, but also explore other alternatives such as workplace strategies and practices to improve office space efficiency. Year 2015 will be a critical year for policy implementation and industry upgrading in the industrial and logistics sector. The manufacturing-oriented sector will face huge opportunities and challenges.”
Office Market - Vacancy in Tier II cities climbs further
Total new completions in Q1 2015 amounted to 2.16 million sq. m., second highest level ever. Shenzhen topped the list with new supply of around 500,000 sq. m. The abundant new supply further drove up vacancy rates in Tier II cities, of which Shenyang, Wuxi, Changsha, Chongqing and Chengdu all reported vacancy rates of close to 40%. Vacancy rates in some emerging sub-markets in the abovementioned cities were as high as 50%.
Demand for office space took a breather in Q1 due to seasonal factors. Net absorption slowed to 1.034 million sq. m., down 7.3% q-o-q. Nonetheless, demand from the fast-growing IT industry remained robust, in particular in Tier I cities. In Beijing, a large number of IT firms sought for more cost-effective office space in Wangjing, while in Guangzhou, several IT tenants with expansion demand relocated to Zhujiang New Town from IT business parks. New set-up demand from IT firms remained firm in Shenzhen, fuelled by continued policy incentives. Demand in Tier II markets, on the other hand, were less upbeat. Small financial institutions such as P2P and asset management companies continued to underpin leasing market, but less active compared to 2014. Demand from MNCs was lacklustre. During the quarter, there were a number of office closures by some high-profile MNCs.
Overall rent only edged up by 0.2% q-o-q in the quarter. Tier I markets, which reported a 0.5% q-o-q rental growth, continued to outperform, driven by resilient demand and a more balanced demand-supply situation. Buoyed by a low vacancy rate and strong rental growth in Pudong, Shanghai led the national office markets by posting a q-o-q growth of 1.2% citywide. Rent in Tier II markets dipped by 0.1% q-o-q. The largest drop was in Wuxi, where a large amount of supply resulted in a spike in vacancy rates and mounting pressure on landlords, leading to a rental decrease of 1.1% q-o-q in the market. Chengdu and Chongqing also saw rental decline in the face of elevated vacancy rates. On the other hand, Tianjin saw an increase in rent for the first time since Q2 2013. Rents remained static in the remaining markets in North China and East China. A modest growth was seen in Wuhan, thanks to a more balanced supply-demand picture and its gateway function to Central China. On the back of the unveiled development plan of five metropolitan areas in China, Greater Wuhan and Chengdu-Chongqing areas are set for rapid economic growth in coming years. National-level policies will likely trigger more new set-up demand in these regional hubs.
Looking ahead, the future pipeline of new supply remains abundant across most markets. On the demand side, we expect occupiers will not only focus on cost control, but also explore other alternatives such as workplace strategies and practices to improve office space efficiency.
Prime Retail Market - Luxury brands align global prices
Total retail supply reached 816,000 sq. m. in the quarter, well down from the 3.4 million sq. m. recorded in Q4 2014. Retailtainment remained the key demand driver, but we saw a pickup in store openings from luxury brands. As such, nationwide vacancy rate declined by 0.4 ppt to 7.8%. Shopping mall rent ticked up by 0.3% q-o-q.
On the back of sluggish luxury spending in China in recent years, French luxury brand Chanel aligned the prices of its products worldwide. In response to that, a number of luxury brands followed suit by closing the price gap between domestic and overseas purchases. The re-aligned prices have boosted sentiments in domestic luxury consumption. The quarter saw a number of luxury brands, bridge brands and designer brands open their stores in Shanghai, Chengdu, Chongqing, Wuhan and Qingdao. However, lifestyle consumption retailers such as F&B and recreational sector were still the major demand drivers. A noteworthy trend is that fashion retailing becomes less a focal point in newly opened malls while F&B is receiving lots of intention. Children-related retail format is catching on. More and more education and language centers that traditionally could not afford higher rents committed space in the malls to enhance their profiles and images. A number of mall operators also brought interactive bookstores with F&B services into their projects to improve foot traffic.
With the intensifying competition of 3C products (e.g. mobile phones, laptops and tablets), an increasing number of 3C manufacturers opened experience stores in the malls to attract consumers. Apple opened six stores in Chongqing, Hangzhou, Zhengzhou, Tianjin and Shenyang just in a single quarter. In a bid to enhance in-store experience, Samsung also opened its first “super experience store” in Chongqing, which combines Scafé services. The other 3C product manufacturers such as Lenovo and ASUS also opened several flagship stores and experience stores. Department stores, on the other hand, continued to struggle. For instance, a total of four Wanda Department stores closed in Shenyang and Qingdao. La Vita Department Store withdrew from Beijing Zhongguancun Plaza. By contrast, some department stores re-opened after tenant-mix adjustments and repositioning, with the effect yet to be seen.
New supply is set to remain abundant in the coming quarters. The roll out of Free Trade Zones and cross-border e-commerce will likely weigh on the brick-and-mortar retail market. Mall operators and retailers who can adapt to the fast-changing retail landscape are more likely to emerge as winners. In luxury segment, luxury brands’ move to narrow the price gap across markets will bring Chinese consumers back to the stores and help strengthen their sales performance in China.
Industrial Logistics Market - The “new normal” is on the horizon
The logistics market remained stable in Q1 2015. Demand from E-commerce, Retail, 3PL and auto industries dominated leasing market. During the quarter, GLP signed a contract with JD.com which took up 190,000 sq. m. of warehouse space. Overall average warehouse rent edged up by 0.2% q-o-q.
On the investment front, investors remained keen in the sector. For example, an American real estate fund established JV with Ambition Mind to jointly develop logistics project in Fengjing, Shanghai in March. In the land market, the scarcity of first-hand industrial land kept driving foreign developers to collaborate with domestics enterprises. The RMB 1 billion joint development of Pufeng project by GLP and Guotong Logistics City this quarter was one such example. During the quarter, Guangzhou and Hubei unveiled new policies to further improve industrial land use efficiency in Q1 2015. We anticipate more measures on industrial land use efficiency to be rolled out across inland cities, and therefore further increase the difficulty of land acquisition in the primary market.
In a recent publication of “The China Industrial Real Estate - The Making of New Normal”, we suggested that 2015 will be a critical year for policy implementation and industry upgrade after an array of policies issued by the central and local government in 2014. As a result, industrial real estate, which is a critical component of manufacturing, is facing challenges as well as opportunities. CBRE believes that under the rapidly changing policy and economic environment, industry upgrading, new standard for industrial property development and strategic planning (of business parks) becomes imperative. A comprehensive and holistic plan and the emphasis on operation will become the new normal in the future development of China’s industrial real estate.
Residential Market - New policies expected to help 1st and 2nd tier housing markets recover
A comprehensive package of new policies for the housing market were announced in Q1 2015. In Feb and early March, the PBOC cut RRR and interest rates in the face of increasing headwinds towards China GDP growth. Subsequent to that, a number of central government entities jointly announced a series of policy easing measures as an effort to stabilize the housing market. Among the easing measures, the lowering of down payment ratio to 40% for second home buyers is expected to boost transaction volume, especially in major cities where housing prices are relatively high and home purchasers are more likely to rely on mortgages. As a preliminary sign of a tepid recovery of the housing market, total sales units in 17 major cities tracked by CBRE posted a 5% growth on a y-o-y basis.
We expect that both transaction volume and price in these cities will further recover in the coming quarters as buyers’ affordability and market sentiment gradually improve. On the other hand, the housing market in lower tier cities is expected to struggle in view of a persistently high stock inventory. More stimulating policies might be required to stabilize the housing market in those cities. On the supply front, the government is committed to achieve a more balanced demand-supply situation in the long term by reducing supply for residential development in markets with oversupply risk, and by converting unsold inventory to public rental housing.
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.