Retail New Supply Hits Records High; Residential Market Stablises Amid Policy Easing
Retail New Supply Hits Records High; Residential Market Stablises Amid Policy Easing
January 29, 2015
CBRE Releases China Real Estate Market Q4 2014 Review
January 29, 2015, Beijing–CBRE, the world's leading commercial real estate services and investment firm, today released its China Real Estate Market Q4 2014 Review.
Key highlights in Q4 market performance include:
1. In the office sector, overall leasing demand remained stable driven by demand from domestic firms. On the other hand, early lease terminations of some local start-ups in a few Tier II cities added pressures on those markets.
2. Total retail new supply in Q4 2014 reached a record high, and we witnessed a two-tiered market evolving over the past few quarters.
3. The logistics market remained largely stable in Q4 2014. Demand from 3PLs, courier delivery services companies and retail industries remained active.
4. Propelled by a relaxation of mortgage lending and interest rate cuts, there was a release of pent-up demand in the residential market.
Frank Chen, Executive Director, Head of CBRE Research, China, comments that “Total retail new supply in Q4 2014 reached a record high. Some new shopping centers featured experience-based elements in responses to the changing consumption habits. As a result of a supply glut and online shopping boom, department stores continued to struggle. As such, an increasing number of brands whose major distribution channel used to be department stores will consider opening directly-owned stores or partner with multi-brand stores”. The report also reviews the market performance of each sector and provides an outlook into 2015:
1. Office market: annual new supply hit a historical record with improvement in leasing demand compared with 2013. Domestic firms continued to underpin leasing activity. Rent demand in Tier 1 cities edged up while remaining mostly stable in Tier 2 cities. Select cities across Middle and West China continued to experience decreasing rents due to oversupply. We anticipate that new supply will remain abundant with office rents in Tier 2 cities facing ongoing headwinds in 2015.
2. Prime Retail Market: numerous prime shopping mall openings continue to draw a variety of international brands in their effort to establish local market presence for the first time, while demonstrating a tenant preference for fast fashion brands, multi-brand store, and buyer shops. With the approach, style and strategy of the entire retail operator industry transforming, retail properties continue their transformation toward the new normal, catering to the macro trends with businesses in F&B, entertainment and similar sectors witnessing rapid expansion across select cities. 2015 retail property supply in major markets remains abundant with shifting consumer behavior and experience as the leading drivers of the retail market transformation.
3. Industrial Logistics Market: market performance is stable overall with the majority of primary cities displaying steady and rising rental rates. Progressive policies are expected to further bolster the growth of traditional logistics warehouse facilities with robust demand for express enterprises who offer modern logistics capability. Overall market rent quotations will continue to demonstrate stability with a slight tendency toward rising rates.
4. Residential market: demand is impacted by the dual forces of reduced mortgage and interest rate policies in 2H 2014 coupled with the degree developers extend promotions through the end of the year. We anticipate that due to the dual trends of investment increase and easy money policy in 2015, Tier 1 and Tier 2 cities where inventory reduction is occurring will display steadier pricing while the market will be less optimistic in Tier 3 and Tier 4 cities where oversupply is obvious.
In Q4 2014, office new completion declined marginally to 1.7 million sq. m. nation-wide. Chongqing, Wuxi, Wuhan and Changsha each saw new completion of over 200,000 sq. m. in the quarter. An influx of supply resulted in record-high vacancy rates in excess of 30% in the above-mentioned cities.
In 2014, however, we did witness an improvement in leasing demand. New setup and upgrading demand from domestic firms continued to underpin leasing activity, while relocation and renewal was the dominating theme for MNCs. Among Tier 1 cities, Beijing’s vacancy rate continued to hover below 5% despite increasing new supply during the year. Financial firms remained active in Shanghai and Guangzhou. As the vacancy rate in Shanghai Pudong area dipped below 2%, an increasing number of tenants had to seek alternatives in Puxi. Underpinned by continued rollout of supportive policies, Shenzhen saw over 30,000 new company registrations during October and November, with wealth management and IT firms being the most active. The leasing market in Tier 2 cities was underpinned by non-traditional financial firms such as P2P companies. While the rapid growth of non-conventional financial companies supported office demand, it also exposed the landlords to a certain level of risks. During Q4, both Chengdu and Suzhou reported a number of cases where such tenants closed down their offices unexpectedly due to financial pressure. On balance, nation-wide vacancy rate increased to 16.3%, up 0.7 ppt q-o-q, as a result of a supply glut.
Despite this, overall rent edged up by 0.4% q-o-q. The growth was driven by the 0.6% increase q-o-q in Tier 1 cities. Rents in Tier 2 cities remained broadly stable. Among all cities that CBRE covers, Shanghai posted the strongest q-o-q growth of 1.6% in Q4, driven predominantly by a tight availability in Shanghai Pudong. The largest rental decline was in Shenyang. This could be attributed to the economic slowdown in North-east China, weak leasing demand, a large amount of new completion and therefore rental decline in a few projects with higher vacancy rates. By the end of 2014, five cities recorded vacancy rates in excess of 30% in the quarter. Among them, rents remained steady in Wuxi, Chongqing and Wuhan as landlords of existing projects were yet to feel the impact of increasing supply. By contrast, lease termination of P2P companies coupled with the new supply led to continued rental decrease in Chengdu. Meanwhile in Changsha, landlords in outdated office buildings had to lower their rents due to tenant outflow.
Looking forward, we anticipate that new supply will remain abundant in markets including Shanghai, Chongqing, Chengdu and Shenzhen in 2015. Cost-sensitive tenants with expansion demand in Tier 1 cities’ CBDs are likely to relocate to other areas or consolidate their existing offices to accommodate increasing employee headcounts. Upgrading demand triggered by new completion will be more common in Tier 2 cities, which is set to put pressure on outdated buildings in prime location as quality tenants continue to explore options available at high quality buildings. Besides, we expect to see more withdrawals of financial companies (such as P2P and local wealth management firms) in Tier 2 cities. Office rents in Tier 2 cities will face more headwinds in 2015.
Prime Retail Market
Total new supply in Q4 2014 reached a record high of 3.4 million sq. m. In Beijing alone, a total of six shopping malls with a total retail GFA of 850,000 sq. m. came to the market during this quarter, setting a record for the largest-ever quarterly new completion across all markets. Other worth-noting projects that came to the market included the Sino Ocean Taikoo Li in Chengdu and the MixC in Wuxi.
Along with increasing new supply, we saw a two-tiered market evolving over the past few quarters. Landmark projects and well-established malls continued to gain traction with customers and retailers, while old-style, poorly-positioned malls struggled to keep up with their competitors. There were a few instances of traditional sub-markets becoming a less preferred destination for retailers. Several department stores closed during the quarter, including NOVO Concept at Tianfu Square Fashion Shopping Center in Chengdu, Central Department Store at The MixC in Hangzhou. A few department stores expanded their retail space by refurbishment as a response to rising competition from one-stop malls.
On the retailer side, several well-established F&B operators opened “sub-brands” to cater for diversified preferences of consumers. New style restaurants such as Tanyu and Seahood branched out rapidly into malls. Bookstores also remained a bright spot in the quarter – Mall operators showed preference to such tenants as they encouraged customers to stay longer by providing dining services. An instance includes the newly opened Fangsuo Commune at Sino Ocean Taikoo Li in Chengdu. In the last quarter of 2014, fashion retailers became more active, led by fast fashion brands and multi-brand stores. For example, Zara opened two flagship stores in Shanghai and Chengdu, respectively, while MUJI opened a flagship store in Chengdu, which provides F&B services for the first time in China. Gap marked its entry into Dalian and Guangzhou, and its diffusion line Old Navy opened its first stores in Beijing and Shenzhen. Also, C&A debuted in Suzhou. Compared to struggling department stores, multi-brand stores became a more attractive option for mall operators. China’s second store of 10 Corso Como opened in Beijing, following its first store in Shanghai. As leasing demand picked up, vacancy rates dipped from 8.5% to 8.2%, while rents of shopping centers increased by 0.5% q-o-q.
A large amount of supply is anticipated in the next 12 months, most of which will concentrate in Beijing, Shanghai, Shenzhen and Chengdu. In view of the mounting supply pressure, we believe that tenant adjustment and repositioning will continue in 2015 and beyond. Given that department stores are scaling down their expansion, brands whose major distribution channel used to be department stores will consider opening directly-owned stores or partner with multi-brand stores. Therefore, we expect more specialized multi-brand stores, cosmetics and shoe brands to open stores in the malls.
Industrial Logistics Market
The logistics market remained largely stable in Q4 2014. Demand from 3PLs, courier delivery services companies and retail industries remained active. On the other hand, in the face of rising competition, a number of e-tailers actually scaled back their operations by relinquishing some logistics space. Despite a slight dip in asking rent in Chengdu market, all cities tracked by CBRE posted flat or upward rental performance. In particular, Shenzhen logistics rents rose 1.6% q-o-q.
The Ministry of Commerce published an extensive guidance in late September, urging the modernization of the logistics sector and upgrading of traditional lower standard warehousing. We anticipate such legislation will underpin the development of the logistics sector and stimulate further demand for modern warehousing. In Shanghai land market, the first industrial land with 20-year lease term in Baoshan Industrial Park was listed, with a unit price of RMB 866 psm.
Looking forward, we expect logistics rents to post mild growth in 2015. A selective number of cities such as Chengdu and Wuhan, though, could be under pressure in the short term due to a supply spike in a relatively short time. Vacancy could rise sharply along with a declining rent. Having said that, we remain confident in the medium to long-term outlook on both markets given their regional hubs status and rising demand could be under pressure in the short term due to a supply spike in a relatively short time. Vacancy could rise sharply along with a declining rent. Having said that, we remain confident in the medium to long-term outlook for both markets, given their regional hubs status and rising demand.
Propelled by a relaxation of mortgage lending and interest rate cuts, there was a significant improvement in purchasing power. On the supply side, developers had been active in launching projects to make up lost ground in the first three quarters. The release of pent-up demand and increasing supply at reasonable price saw significant pick-up in transaction volume in major Tier 1 & 2 cities. Total sales units in 17 major cities tracked by CBRE surged 45% q-o-q to a five-year high. In December 2014, the central housing authority released the “Provisional Regulations for Property Registration”. While it had exerted limited impact on the property market in the short term, it is clear that government’s intention is to establish a long-term regulation mechanism in the property market.
In view of the increasing headwinds in the domestic economic growth, the central government has stepped in with a more proactive fiscal policy. In 2014, total investment approved by NDRC reached RMB 1.6 trillion. In the meantime, the PBOC also adopted more accommodative policies in recent months, including interest rate cuts, reserve ratio cut for targeted industries, and relaxing rules for calculating deposits. This has sent out a clear signal of loosening monetary policies. Against this backdrop, we expect housing prices to stabilize with increasing transaction volume in 2015. However, market performance is likely to further diverge between major gateway cities, where demand is more resilient and supply is more limited, and lower tier cities, which continues to be haunted with oversupply concern and increasing downward price pressure.
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.