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OFFICE SECTOR

Greater China Real Estate Market Outlook 2020


Hear from our experts


SIGNS OF RECOVERY


KEY DEMAND DRIVES UNAFFECTED BY CORONAVIRUS OUTBREAK 

 

Nationwide office net absorption registered 3.36 million sq. m. in 2019, a decline of 37% y-o-y, due to the combined of U.S.-China trade conflict, the slowdown in P2P lending due to deleveraging and the consolidation of the co-working sector.

While these headwinds are expected to wane in 2020, the coronavirus outbreak poses a new downside risk to the office leasing market in the short-term.

Office demand among sectors most affected by the virus such as hospitality, F&B, transportation and retail will be hit heavily. However, CBRE’s analysis shows that the impact on the key demand drivers of TMT, finance and professional services, will be much lighter. The outbreak could even stimulate extra office leasing demand from certain TMT sub-industries such as online gaming, education and enterprise online working services.

In 2019, TMT, financial and professional service sectors accumulatively accounted for 60% of total nationwide leasing volume – a proportion that could further increase in 2020.

 

Figure 4 


FINANCIAL AND TECH SECTOR CONTINUE TO EXPAND IN CHINA

 

FINANCIAL SECTOR DEMAND EXPECTED TO STRENGTHEN

This year will see the removal of limits on the ratio of foreign capital permitted in the life insurance, futures, funds and securities industries. The national treatment of foreign entities in credit rating, payment and other industries will also be implemented. Foreign financial institutions accelerated their pace of investment in China in 2019, with CBIRC data showing that ten foreign-invested insurance institutions received approval to increase their capital by RMB 16.82 billion, a 172% increase on 2018.

Several leading financial companies have already received approval to set up foreign holding companies and commence operations in China. These include Allianz, JPMorgan Chase Securities and Nomura Orient International Securities.

Foreign-funded financial institutions will emerge as an important new engine of demand in 2020. Core CBDs in financial gateways such as Beijing, Shanghai and Shenzhen are expected to see an increase in requirements from such tenants.

Figure 5

2020 is expected to be a milestone for the investment and application of 5G infrastructure, with 5G base station installation expected to rise from 50,000 in 2019 to 680,000 in 2020.

ABC COMPANIES TO DRIVE NEW LEASING REQUIREMENTS

5G adoption will accelerate the development of related industries. In particular, “ABC” companies – referring to those in the Artificial Intelligence (AI), Big Data/Blockchain and Cloud Computing fields – are expected to expand rapidly amid the growth of related industries including intelligent security, smart buildings, driverless vehicles, video broadcasting and e-sports.

In the cloud gaming industry, iMedia Research says that 5G commercialisation will propel the industry size from RMB 630 million in 2018 to over RMB 100 billion in 2023. In the AI segment, data1 recently stated that "82% of domestic enterprises that have not yet adopted AI are planning to deploy it over the next one or two years, and those who are already using AI plan to at least double their investment over the next two years."

Figure 6
 

 

Source : CBRE Research, February 2020


SUPPLY PIPELINE REMAINS SUBSTANTIAL

 

Figure 7 

The coronavirus outbreak will impact both office supply and demand in 2020. There is a high likelihood that around 13% of scheduled pipeline stock will be delayed. Should this occur, annual new supply would fall to 8.9 million sq. m. New supply will be added in both core and new CBDs.


Figure 8 

CBRE expects nationwide office demand to dip by as much as 40% y-o-y during Q1 2020, followed by a period of stabilisation and recovery in subsequent quarters. As a result, full year office net absorption is forecast to reach 3.5 million sq. m., a figure on par with 2019, but a decline of 19% from previous forecasts.

Nationwide vacancy is expected to reach 25% in 2020, with 15 cities forecasted to record high vacancy. Declining supply and improving demand should ensure vacancy falls after 2021.

DECENTRALISATION WILL CONTINUE

 

The trend for occupiers to decentralise will continue as lower rents in emerging areas lure tenants - especially companies in cost-sensitive industries - from established locations. Almost 70% of relocation deals in Shanghai Qiantan completed in 2019 involved manufacturing and life sciences companies.

New infrastructure, amenities and incentives will also support decentralisation. New metro lines serving Shenzhen Qianhai and Hangzhou Qianjiang Century City are due to open this year, while Qiantan saw the launch of the Shanghai Crystal Qiantan Shopping Centre. New CBDs are also offering financial and talent incentives.


Figure 9 

CBRE has also observed cases of recentralisation occurring as availability improves in core CBDs in several cities.

Figure 10 

Upgrading demand from professional services and finance companies will continue to dominate the leasing market in core CBDs. Firms in these industries completed 100,000 sq. m. of relocations (from the Second East Ring area and Wangfujing) or upgrading (within the CBD) deals in the Beijing CBD in 2019. These tenants will also continue to propel recentralisation demand in 2020.



LANDLORDS MUST OFFER SERVICE BEYOND SPACE

 

DIFFERENTIATION AND ADDING VALUE WILL BE KEY

Occupier demand for office space is becoming more agile and diversified. Non-financial aspects such as flexibility, sustainability, and wellness are now far more prominent selection criteria, while companies are considering a greater range of space formats such as coworking spaces and turnkey solutions.

Landlords seeking to remain competitive are offering more flexible lease terms, office space and services. With regard to lease terms, greater flexibility around the payment of deposits and renewal conditions are increasingly common approaches.

In terms of space and services, landlords are improving employee experience by providing an offering that includes co-working space, fully-fitted turnkey solutions, multifunctional conference rooms, fitness and catering amenities. Air purification equipment, visitor control measures and property management are set to take on greater importance after the coronavirus outbreak is contained.

Proptech such as tenant engagement platforms can be harnessed to further enhance service quality. For example, Shanghai Raffles City on the North Bund offers facial recognition technology, online visitor invitations and community activities via its in-house mobile application. It also features a range of amenities including yoga rooms, training classrooms, sports venues, flexible office space, rooftop gardens and other facilities. Elsewhere, the CP Center in the Beijing CBD includes facial recognition in its elevator systems, intelligent parking, roof gardens and co-working spaces by Atlas.

Figure 11

Flexible leasing and combining space, service and technology will be a key differentiator for landlords in 2020.



RENTAL DECLINE TO CONTINUE BUT AT A SLOWER PACE

 

Provided the coronavirus outbreak is contained by March/April 2020, the impact on office rents in most markets will be limited. Office rents in Shanghai fell by 0.5% q-o-q in Q2 2003 at the peak of the SARS outbreak, but quickly recovered in H2 2003. However, new supply and rising vacancy will continue to exert pressure on key office markets in 2020, with average rents expected to fall by 1.5% nationwide.

Although Beijing, Shanghai and Shenzhen will continue to see abundant supply, the recent decline in rents has lost momentum due to the easing of the U.S.-China trade dispute, recovering demand from the financial and technology sectors as well as the maturing development of professional services companies.

Rents in Guangzhou are expected to stabilise, underpinned by lower availability and the strong performance of Grade A buildings in Pearl River New City and Tianhe Sports Center. However, older buildings in core areas and newer projects in Pazhou may lag behind.

Tier II cities will continue to struggle, with rents projected to fall by over 1.8%. Weaker demand will drag on rents in tier II cities in North China, with Wuhan set to come under significant pressure due to its location at the epicentre of the outbreak. A sharp short-term increase in supply will weigh on rents in Nanjing. However, the rental decline in core tier II cities including Chengdu and Hangzhou is expected to be limited.

Figure 12 

Greater China Market Outlook 2020

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Contacts

Ada Choi
Ada Choi, CFA
Head of Research, Greater China
& Head of Occupier Research, APAC
+852 2820 2871
+852 2810 0830
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Sam Xie
Head of Research
China
+86 21 2401 1318
marcos-chan-326x248-25072019
Marcos Chan
Head of Research
the Greater Bay Area and Hong Kong
+852 2820 2886
Ping Lee
Ping Lee
Head of Research
Taiwan
+886 2 7706 9552