Greater China Real Estate Market Outlook 2020

The outbreak of the Wuhan Coronavirus (COVID-19) which began in December 2019 and has intensified in the first few weeks of 2020 poses a new downside risk to the Greater China and, to a lesser degree, global economy.

CBRE expects China’s GDP growth to dip in Q1 2020 but the impact should largely be confined to H1 2020 if the situation is brought under control and does not escalate significantly in major cities. Full year GDP forecasts have been adjusted down by 50 bps to 5.6%. The outbreak is likely to hamper any economic recovery in Hong Kong SAR, which is steel feeling the impact of widespread sociopolitical unrest during H2 2019. The city’s t ransportation, tourism, hotels and F&B sectors will be most seriously affected. The impact on Taiwan will be relatively mild.

Advances in technology such as surveillance and big data along with more developed logistics infrastructure means the government is well equipped to limit the spread of the virus. The government has begun to roll out monetary and fiscal policies to stabilise the economy, with additional measures in the pipeline.

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Top 10 Trends in Greater China

1. Business sentiment is improving but challenges remain

• The signing of the Phase One trade agreement between China and the U.S.in mid January has boosted business sentiment across the region.
• The coronavirus outbreak is expected to have a significant but short lived effect on the China economy in H1 2020, with a recovery expected to commence in the latter half of Q2 2020.
• The Hong Kong SAR economy is likely to stabilise gradually in the second half of the year. In Taiwan, reshoring by local manufacturers will support growth.

2. Financial sector opening up bodes well for office demand

• The financial sector is set to display solid leasing demand across Greater China in 2020.
• Chinese authorities have announced a range of measures to open the sector to foreign institutions, including permitting the formation of wholly owned subsidiaries and expediting approvals.
• Despite its still volatile business environment, Hong Kong SAR will continue to serve as a major financial hub for Greater China.

3. 5G adoption to support growth of ABC tech industries

• The full implementation of 5G in 2020 will support the development of three key technologies Artificial Intelligence, Blockchain and Cloud Computing otherwise known as the “ABC industries”. FinTech is also gaining importance in leading financial hubs including Hong Kong SAR.
• In China, the shift to 5G is set to create 3.5 million jobs in the next five years.
• Further growth in TMT demand will support the development of new tech parks, business parks and data centres in Greater China.

4. Interest rates will remain low

• China is poised to further cut the Reserve Required Ratio (RRR) and interest rates in Q1 2020 to mitigate the effect of the coronavirus outbreak. This will widen the yield spread and provide support for commercial real estate investment.
• The latest economic forecasts expect the U.S. Fed Funds Rate to remain flat in 2020. Banks in Hong Kong SAR and Taiwan are expected to follow suit.

5. Office markets will shift in favour of tenants

• China will see a large volume of new office supply in 2020, although the coronavirus outbreak could delay project completions. Tenants will gain the upper hand in negotiations and will enjoy a wider range of leasing options.
• The Hong Kong SAR will see availability improve in core locations, creatingflight to quality opportunities for occupiers. In Taipei, limited new supply will provide landlords with a stronger hand in negotiations.

6. Growing opportunities for flight to quality relocations

• CBRE expects China’s supply peak to last until 2021, with the rental correction set to narrow in key markets over the course of this year. Tenants are advised to capitalise on opportunities for flight to quality relocations.
• Although new supply will be limited in the Hong Kong SAR in 2020, there will still be opportunities for tenants to upgrade to better buildings offering lower rents.
• Taipei will see limited relocation options in the next two years. In the longer term, decentralisation to new buildings will emerge as a trend.

7. Occupier to prioritise portfolio agility

• CBRE expects companies to build greater flexibility into corporate real estate strategy as they seek to navigate the rapidly shifting business environment.
• Strategies will include adopting Activity based Working (ABW) and utilising smart corporate solutions in coworking centres.
• Although flexible space providers are undergoing consolidation after several years’ rapid expansion, the sector is here to stay and will enhance its service offering to corporate occupiers.

8. The localisation of retail consumption

• The focus of Chinese consumption is already shifting back to the domestic market. The depreciation of the RMB, the growth of cross border e-commerce and the temporary suspension of international air travel in response to the coronavirus outbreak will add to momentum in 2020.
• Chinese brands which can quickly adapt to shifting consumer trends and possess strong homegrown appeal are set to play a more dominant role in the leasing market.
• The decline in Chinese visitor arrivals will continue to weigh on retail property performance in Hong Kong SAR but community malls will be resilient. Taiwan’s retail industry which is largely driven by domestic demand is set to remain stable.

9. The introduction of smart logistics

• Logistics occupiers are striving to create efficient distribution systems to accommodate e commerce related parcel growth and rising costs Landlords will need to enhance their service offering to meet occupiers’ evolving needs.
• CBRE expects to see the development of more high tech specialised logistics facilities across Greater China that support full automation. Build to suit projects will be necessary to meet occupiers’ facility specifications and technological requirements.

10. Stronger emphasis on structural investment themes

• Although investors will continue to benefit from low interest rates, room to ride on the rental growth cycle is limited. CBRE expects structural investment themes to become more prominent in 2020, led by what we call the “3Ds”:
• Different sectors - Demand for logistics properties will continue to grow. Niche sectors including data centres , tech parks, medical offices and real estate debt will be increasingly sought after.
• Defensive - Macroeconomic uncertainty will prompt investors to focus on first tier cities and assets that have promising income streams.
• District specific - Individual market fundamentals within Greater China can vary widely. CBRE prefers mature core business districts, tech parks and developments next to or atop transportation hubs.