EAST CHINA REAL ESTATE MARKET 1H14 REVIEW & 2H14 …€¦ · Colliers International | East China Real Estate Market 1H14 Review & 2H14 Outlook 3 SHANGHAI (CBD & DBD Grade A) Shanghai’s

EAST CHINA REAL ESTATE MARKET 1H14 REVIEW & 2H14 OUTLOOK

2 East China Real Estate Market 1H14 Review & 2H14 Outlook | Colliers International

ContentsOffice 3

Shanghai (CBD & DBD Grade A)

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Second-Tier Cities (Suzhou, Hangzhou, Nanjing, Wuhan and Xiamen)

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Retail 8Shanghai 8Second-Tier Cities (Suzhou, Hangzhou, Nanjing, Wuhan and Xiamen)

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3Colliers International | East China Real Estate Market 1H14 Review & 2H14 Outlook

SHANGHAI (CBD & DBD Grade A)Shanghai’s GDP increased by 7.0% y-o-y in 1Q14, a deceleration of 0.8 percentage points from the same period of 2013. Regardless of this slowdown, overall demand for Shanghai’s quality office space remained steady in 1H14, underpinned by the city’s modern service industry. As a result, the vacancy rates in both the CBD and the decentralised market edged down from the same period of 2013. The market continued to diversify, with Pudong’s rental growth continuing to outpace Puxi on the back of the limited supply and increasing demand. At the same time, decentralised business districts outperformed the CBD in terms of annual rental growth, supported by several recently completed properties with higher building specifications.

During 1H14, the CBD Grade A office market received four new completions with a combined office GFA of 202,452 sqm. Three projects, with a total office GFA of 182,852 sqm, are located in Puxi, accounting for 90.3% of the total new supply. Correspondingly, the vacancy rate in Pudong’s CBD market declined to the lowest level in the past six years, at approximately 1.2% as of end-1H14, whilst that in Puxi increased slightly to approximately 11.4%. Corporate clients from the finance and professional services sectors, as well as retail and trading companies, were primary demand generators in 1H14. Domestic firms, particularly banks, funds and investment companies, played a larger role than MNCs in generating demand for expansions and new set-ups. Headline leasing transactions included: Hanas New Energy’s new lease of 4,800 sqm at IFC North Tower in Lujiazui; New Balance’s relocation of 3,500 sqm from Cross Tower to Henderson 688 Plaza in Jing’an District; Marubeni Corporation’s relocation of 3,414 sqm from Hang Sang Bank Tower to Jing’an Kerry Center Tower III in Jing’an District; Ping An Leasing’s new set-up of 2,400 sqm at II IFC in Lujiazui; and Haiyin Wealth’s new lease of 2,300 sqm at Oriental Financial Plaza in Lujiazui.

By the end of 1H14, the average rent in the CBD Grade A office market increased by 2.8% h-o-h or 3.8% y-o-y to approximately RMB9.1 psm per day as of end-1H14. The overall rental growth accelerated mildly from 2013, primarily supported by the robust increase in Pudong, which continued to outpace Puxi given its limited supply and increasing demand. Pudong’s average rent increased by 6.1% h-o-h or 10.0% y-o-y to RMB9.6 psm per day as of end-1H14. In Puxi, the average rent grew by just 0.4% h-o-h or decreased by 0.6% y-o-y to RMB8.8 psm per day.

OFFICE

“ ... Pudong’s rental growth continuing to outpace Puxi on the back of the limited supply and increasing demand. At the same time, decentralised business districts outperformed the CBD in terms of annual rental growth... ”


The decentralised market in Shanghai remained dynamic in 1H14 on the back of the continued trend of decentralisation, as well as improvements to both infrastructure and project quality. During this period, three properties with a total office GFA of approximately 244,524 sqm were completed, leading the total stock of this segment to increase by 18.2% h-o-h to approximately 1.59 million sqm as of end-1H14. Correspondingly, the average vacancy rate grew by 3.1 percentage points h-o-h to approximately 19.7% as of end-1H14, which was still 3.3 percentage points lower than end-1H13. Demand from corporations relocating from downtown areas as well as those upgrading from lower grade buildings was stimulated by the new completions, with net absorption increasing by 38.3% h-o-h or 42.7% y-o-y to 154,313 sqm in 1H14. Meanwhile, the average rent of the decentralised areas increased by 5.5% h-o-h or 5.8% y-o-y to approximately RMB5.6 psm per day as of end-1H14. The annual rental growth in the DBD market was approximately 2.0

percentage points higher than the CBD average, partly due to its start from a lower base, as well as several recently completed properties with higher building specification.

Shanghai’s office investment market was less active in 1H14 than

the same period of 2013. A total of four en bloc sales transactions

were concluded, including three deals in CBDs and one in the

decentralised market. Activity by foreign institutional investors

slowed during this period, due to a lack of value-added properties

(for opportunistic funds) and stabilised properties with acceptable

yields (for core funds). RMB-denominated funds actively sourced

deals in both the CBD and DBD markets, though preferred

strata-title arrangements to facilitate their eventual exit. Given

increasing price expectations among vendors in the CBD market,

an increasing number of investors sought opportunities in the

city’s decentralised business districts, as well as business parks in

established areas such as Zhangjiang and Caohejing.

According to an economic outlook released by the IMF in April 2014, China’s economic growth is expected to decelerate to 7.5% in 2014 and 7.3% in 2015. However, the shift to a service-led economy, Shanghai’s ambition to become a global financial centre and the city’s position as a destination for regional headquarters should support demand for Shanghai’s quality office space in

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Figure 1: Shanghai CBD Grade A Office New Supply, Net Absorption and Vacancy Rate

Source: Research, Colliers International, 2014

Pudong Average Rent

RMB9.6psm per day

Puxi Average Rent

RMB8.8psm per day


the medium- to long-term. Corporate clients in sectors such as finance and investment should continue to be active, particularly as they become significant sources of financing for many domestic firms in light of tightening credit. Leasing demand from sectors such as pharmaceuticals, consumer goods and professional services should continue to grow over the medium- to long-term, in line with the government’s effort to pivot from investment to domestic consumption to drive the economy.

In the second half of 2014, Shanghai’s CBD office market is

expected to receive three new completions with a total office GFA

of approximately 114,000 sqm, lower than the amount of new

supply during the same period of previous years. As a result, the

vacancy rate should remain largely flat regardless of the new

completions, whilst the average net effective rent should increase

moderately, underpinned by the strong growth of the Pudong

submarket. Meanwhile, nine projects with a total planned office

GFA of approximately 518,371 sqm are scheduled for completion in

the city’s decentralised areas in 2H14, leading the overall vacancy

rate of this segment to increase moderately.

In the remainder of 2014, the office investment market is expected to remain quieter than previous years, given a limited amount of opportunities. Certain landlords may offer more

generous negotiation terms to secure a transaction, leading to a slight correction of the capital value in both CBD and DBD. Correspondingly, yields should expand moderately on the back of the anticipated increase in rental values. Moreover, the decentralised areas, as well as business parks in established areas, are expected to draw increased attention from investors seeking higher returns than Shanghai’s CBD office market currently offers.

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Average Effective Rent (LHS) Change y-o-y (RHS)

Figure 2: Shanghai CBD Grade A Office Average Effective Rent and Change y-o-y


SOHO Fuxing Plaza, Shanghai


All second tier cities, including Suzhou, Hangzhou, Nanjing, Xiamen and Wuhan, in the East China region witnessed new completions in their office markets in 1H14. The highest levels of new supply were in Xiamen and Nanjing, with four new completions in each market. By the end of 1H14, all cities except for Nanjing had more than 1.5 million sqm of existing prime office stock, led by Xiamen, with approximately 2.6 million sqm.

Leasing activity slowed in all five cities during 1H14, echoing a general economic deceleration. Suzhou, Nanjing and Xiamen all registered h-o-h decreases in net absorption. However, demand continued to be active for high-quality office space in locations with mature business environments. Xiamen recorded the highest vacancy rate (24.1%) of all tracked cities during the period, as a result of a large amount of new supply.

In several cities, the overall vacancy rate masked dramatic differences between established areas and emerging areas. In Hangzhou, for example, the vacancy rate for downtown (Wulin) property was 4.2% but 44.3% in Qianjiang New City, an emerging

area. In Xiamen, these figures were 13.9% for downtown (Lujiang Avenue) and 44.9% in Guanyin Mountain. This gap was also witnessed in Nanjing, though to a lesser degree.

Hangzhou’s average rent remained the highest among the five cities, at RMB4.7 psm per day by the end of 1H14, followed by Nanjing (RMB4.1), Wuhan (RMB3.0), Suzhou (RMB2.6) and Xiamen (RMB1.7). The above-average rent of high-quality new supply raised the average rent in Suzhou and Nanjing during the period. However, excluding the effect of the new supply, all cities except Wuhan faced downward pressure on rental growth.

Both domestic and foreign institutional investors remained cautious towards these cities in light of a huge amount of new supply and the downward pressure on rents. Hangzhou was the only city to record an en bloc sales transaction during 1H14. Strata-title sales remained popular. In Suzhou, several landlords adopted both a lease and strata-title sales strategy at their properties in a bid to maximise and quicken their investment returns.

SECOND-TIER CITIES (SUZHOU, HANGZHOU, NANJING, WUHAN AND XIAMEN)

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Total Stock (LHS) Vacancy Rate (RHS) Tier II Cities Avg. Vacancy Rate (RHS)


Figure 3: Tier II Cities Prime Office Total Stock and Vacancy Rate

“Leasing activity slowed in all the five cities during 1H14, echoing a general economic deceleration. ”


A large amount of future supply is expected to enter these cities in 2H14, increasing concerns of oversupply. Wuhan, in particular, will see an estimated 760,950 sqm of new supply in 2H14, accounting for nearly 45% of the city’s existing stock. Assuming all projects are delivered on schedule, the city’s office market stock will exceed two million sqm by end-2014, raising significant challenges for landlords.

In light of the current deceleration in economic growth, some local governments have attempted to stimulate demand, with policies such as one-off rental subsidies for new entities in Nanjing’s Hexi area and subsidies for IT companies by Suzhou International Science Park in Suzhou’s SIP. Despite these incentives, supply is expected to exceed demand in all of the tracked cities, leading to increases in the overall vacancy rate. However, the gap between established areas and emerging areas will persist in the short- to medium-term. Properties in prime locations with professional management should continue to have a strong outlook on their asset performance.

In addition, the new supply will put strong downward pressure on rental growth, with many landlords offering rental concessions in order to attract tenants. At the same time, an increase in building quality is expected to lead to higher than average rent at new completions in Suzhou, Nanjing and Wuhan, offsetting the downward pressure on the average rents to some extent.

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Figure 4: Tier II Cities Prime Office Average Rent

WOCICC, Xiamen

Hua’s International Plaza, Wuhan Jinghope Plaza (East Tower), Suzhou


SHANGHAI

Shanghai’s retail sales market experienced a slowdown in 1H14,

reflected in a deceleration of economic indicators and a moderate

correction in the average rent. The impact of e-commerce and the

Central Government’s increased attention to corruption issues both

played a part in the general deceleration. This was echoed by the

city’s retail sales growth of consumer goods, which decelerated

to 7.5% y-o-y in the first five months of 2014. The effect on the

property market was seen in a slight decline in the average rent

of mid- to high-end shopping centres in 1H14, compared with

end-2013. However, this slowdown had a limited impact on the

confidence of retailers in Shanghai, and the overall vacancy rate

declined as a number of brands opened new stores.

Shanghai’s mid- to high-end shopping centre property market witnessed an absence of new supply in 1H14. As a result, the total stock remained unchanged at approximately 3.7 million sqm. By area, total stock in Puxi was 4.4 times that of Pudong, where supply remained limited. By segment, retail stock in non-prime locations accounted for 63% of the city’s total stock, and was 1.7

RETAIL times that of the prime area. Notably, developers have scaled up the size of shopping centres in Shanghai, with more than 60% of new developments between 2011 and 2013 over 100,000 sqm (compared to about 20% between 2008 and 2010). This has happened at the same time as developers have targeted areas beyond prime locations, and is reflected in the fact that just 31% of new supply from 2011 to 2013 was in prime areas, compared to 43% from 2008 to 2010.

Shanghai’s retail property market continued to see sustained demand from many domestic and international brands in 1H14. This was underpinned by the fashion, F&B, luxury, cosmetics, electronics and personal care sectors, with the overall vacancy rate decreasing moderately from end-2013 to approximately 6.5% as of end-1H14. Additionally, given that demand from the F&B sector was particularly strong, several landlords adjusted the trade and brand mixes to increase the proportion of this sector. However, the amount of expansions and new openings was constrained by a lack of new supply during the period, with net absorption in 1H14 recording just 32,614 sqm, a substantial decrease from the same period of the previous year. Notable openings included: British fast fashion brand New Look’s launch of its first store in mainland China at Cloud Nine Shopping Centre in February, followed by another two stores at Xujiahui’s Metro City and Jinqiao’s Lifehub @ Jinqiao at the same time in March; Abercrombie & Fitch’s opening

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Figure 5: Shanghai Mid- to High-End Shopping Centre New Supply, Net Absorption and Vacancy Rate


of its first mainland China flagship store of 1,800 sqm at Jing’an Kerry Centre, and H&M’s opening of its largest mainland China store at Mosaic, a four-story, 3,500 sqm space.

By the end of 1H14, the average ground floor fixed rent in Shanghai’s mid- to high-end shopping centres edged down by 0.3% h-o-h (though increased by 1.6% y-o-y) to RMB40.9 psm per day, mainly due to a rental decrease at one property in the decentralised retail area. The average rent of the decentralised market decreased by 1.8% h-o-h to RMB29.5 psm per day as of end-1H14, whilst in the prime retail area, sustained demand and annual rental adjustments in several high-end projects supported a 0.5% h-o-h rental increase to RMB56.4 psm per day.

consumption power and population density.

Six projects with a total retail GFA of approximately 491,000 sqm are expected to complete in 2H14, including Crystal Galleria and Starry Sky Mall. These projects will lead the existing retail stock to increase by 13.2% to approximately 4.2 million sqm as of end-2014. Four of these new developments (representing 387,000 sqm) will be located in non-prime retail areas and, as a result, new supply in prime locations will remain limited.

Given the strong revenue performance in the F&B sector, demand from this sector is expected to remain active, and landlords are expected to increase the proportion of F&B in their projects through adjustments to the trade mix. As a result of these adjustments and the upcoming new supply, the overall vacancy rate is expected to edge up in the short term.

The large amount of new supply in non-prime areas, and their expected below-average rent, is forecast to pull down the average ground floor fixed rent in these segments. However, certain high-quality projects in prime locations will continue to see strong demand and a concurrent increase in average rents.

In the investment market, stable demand and limited investment opportunities are expected to lead the capital value for retail properties to remain stable in the short- to medium-term.

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Figure 6: Shanghai Mid- to High-End Shopping Centre Ground Floor Rent and Change y-o-y


Shanghai’s retail property investment market was less active in 1H14 than 2013, with only one equity deal recorded. However, investors entering this segment in China continued to be attracted to Shanghai, given its mature retail environment, strong

Mid- to high-end shopping centres

RMB 40.9 psm per day

Decentralised Market

RMB29.5 psm per day


SECOND-TIER CITIES (SUZHOU, HANGZHOU, NANJING, WUHAN AND XIAMEN)

Retail sales of consumer goods in most cities within the East China region continued to grow at double-digit pace in the first five months of 2014, despite the concerns of a general economic slowdown. This underpinned the continued development of the retail property market in these cities, reflected in a decline in the vacancy rate in all five cities for existing projects. However, new supply in all cities but Xiamen led to a short-term rise in their overall vacancy rates. Notably, Wuhan recorded the highest vacancy rate of 9.0% as a result of the addition of new supply, and increasing vacancy at a single shopping centre (due to challenges with market positioning). Xiamen had the lowest vacancy rate (5.0%) by end-1H14.

In 1H14, of these five cities, four received new completions, most of which were located in suburban or emerging areas, demonstrating the ongoing decentralisation of shopping centres in second tier cities. As landlords in these new projects offered competitive rents in exchange for high occupancy rates, the overall rents in most cities saw either limited growth or an h-o-h

decline. Wuhan’s average rent remained the highest of these cities (as it has since 2011) at RMB28.2 psm per day as of end-1H14. This is primarily due to a single high-end shopping centre in Wuhan, where rent is much higher than the rest of the city, and its effect of pulling up the city’s overall average rent significantly. Wuhan’s ranking was followed by Nanjing, Hangzhou, Xiamen and Suzhou, where rents were RMB15.8, RMB15.2, RMB10.5 and RMB10.5 psm per day, respectively, as of end-1H14.

A total of two en bloc sales transactions were concluded in Hangzhou and Suzhou in 1H14, both for projects less than 30,000 sqm. Opportunities for large-scale retail premises with sound track records remained limited, as local developers preferred

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Figure 7: Tier II Cities Mid- to High-End Shopping Centre Total Stock and Vacancy Rate

Raydu, Nanjing


holding on to their assets for greater capitalisation. By contrast, strata-title sales remained popular for individual investors given flexible choices for price and location.

Strong retail sales growth, continuous infrastructure improvement, the expansion of more brands towards second tier cities and completions of new projects are all expected to support or accommodate leasing demand in all five cities in the short term. Fashion brands will remain one of the key drivers for demand, but F&B, education, and children’s care will play increasingly important roles in the leasing market.

In line with the trend of the past three years, the decentralisation of new shopping centres will continue to be a major theme in all cities but Xiamen in 1H14. In Wuhan, four of the seven new completions in 2H14 will be located in non-prime locations; in Hangzhou, this figure is three of four; in Nanjing, four of five; and in Suzhou, two of two. On a GFA basis, these non-prime location projects should account for 81.5% of all the future supply in these cities in 2H14.

Correspondingly, the average vacancy rates in these four cities are forecast to grow in the wake of the new completions, while lower rents offered by projects in non-prime areas will pull down the average rents in the short term. For retail premises in prime areas with good management, demand should remain strong as brands

move beyond tier I cities, with rental performance continuing to be stable. In Xiamen, the overall vacancy rate is expected to remain stable despite the mild fluctuations associated with the launch of new supply. Moreover, the completion of a high-quality project and renovation of an existing project in Xiamen are expected to lead to a moderate increase in the city’s overall rent.

In the investment market, en bloc opportunities will remain limited, and investment activity will primarily be in the strata-titled sales market. Suzhou is expected to be the only exception, as stricter guidelines aimed at the city’s strata-titled sales market (introduced by the municipal government in 1Q14) may dampen activity in this sector as well.

Xiamen

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Figure 8: Tier II Cities Mid- to High-End Shopping Centre Ground Floor Rent


“ ...the average vacancy rates in these four cities are forecast to grow in the wake of the new completions, while lower rents offered by projects in non-prime areas will pull down the average rents in the short term... ”


Copyright © 2014 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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EAST CHINA REAL ESTATE MARKET 1H14 REVIEW & 2H14 …€¦ · Colliers International | East China Real Estate Market 1H14 Review & 2H14 Outlook 3 SHANGHAI (CBD & DBD Grade A) Shanghai’s