CBRE Releases China Real Estate Market Q3 2014 Review
CBRE Releases China Real Estate Market Q3 2014 Review
October 28, 2014
Retail sector boosted by lifestyle consumption growth;policy measures support residential market
October 28, 2014, Beijing – CBRE, the world's leading commercial real estate services and investment firm, today released its China Real Estate Market Q3 2014 Review.
Office new supply rebounded to 1.82 million sm in Q3. The increasing availability of high quality office buildings resulted in a release of relocation and upgrading demand. International retailers remained keen on expanding in China, with multi-brand stores becoming a new highlight. In the meantime, fast fashion brands (FFBs) branched out rapidly into lower tier cities, and were active in launching their online platforms. More department store, hypermarkets and specialty store operators have embarked on transitions to launch shopping malls in reaction to the rapidly changing retail landscape. With the exception of a few cities, the under-supply situation of logistics facilities continued in this quarter. 3PLs remained the dominant demand driver for warehouse leases. The relaxation of Home Purchase Restriction (HPR) and developers’ proactive launching schedules helped stabilize the residential market in Q3. PBOC’s recent effort to ease mortgage policies will further underpin the housing market recovery. We believe that developers will continue to set price at a competitive level to attract prospective buyers, and home sales will further recover.
Frank Chen, Executive Director, Head of CBRE Research, China, comments that “China retail market has been rapidly changing, and lifestyle consumption retailing is now a common theme. F&Bs, 3C experiential shops and recreational facilities for kids become the silver bullets to drive footfalls. FFBs remain keen on expansion, and in the meantime launching e-commerce platforms. In response to the rapidly changing appetite of consumers, more department store, hypermarkets and specialty store operators have embarked on transitions to launch shopping malls. The housing market has attracted public interests since the relaxation of HPR and the ease of credit policies. The preferential policies have stimulated the rigid demand and upgrading demand. As more developers trade price to boost sales volumes, we believe that national transaction volume will further recover in the coming quarters.”
Total office completions increased by 50% q-o-q to 1.82 million sm in Q3 2014. All major cities tracked by CBRE, except for Dalian, reported new supply. East China accounted for approximately 30% of the total, ranking first across all regions. Tier I cities, which saw limited new supply over the last few quarters, registered a total of 575,000 sm of new office supply in the quarter, a three-year high. Triggered by the abundant new supply, the period saw the sustained release of upgrading and relocation demand, resulting in the steady growth of net absorption (up 42.6% q-o-q nationwide). The average vacancy rate remained flat at 15.2% on the back of buoyant office take-up. The vacancy rate in tier I cities edged down by 0.1 ppt q-o-q, marking the fourth straight quarter of improvement. However, Tianjin and Chongqing witnessed an upswing of 5.5 and 3.2 ppts, respectively, due to abundant new supply.
Demand was largely driven by new startups, with Shenzhen being the key beneficiary. In June 2014, Shenzhen was designated as the first city-wide Innovation Pilot Zone by the State Council. This, in CBRE’s view, will attract more startups to the city, and directly lead to new office demand. Qianhai, the new special economic zone (SEZ) in Shenzhen, recently announced a number of preferential policies, including the promotion of cross-border e-commerce. As a result, new company registrations surged to over 3,000 between June and August, a record high since the establishment of the Qianhai SEZ in 2010. In addition, the better availability of quality office space triggered the release of upgrading and relocation demand. This, to some extent, has negatively affected outdated office buildings in the traditional CBD area as they face increasing challenges in retaining quality tenants. The changing landscape is placing such landlords in a weaker position. This trend was most evident in the traditional CBDs of cities such as Guangzhou, Chengdu and Changsha. In contrast, landlords with multiple properties were able to increase their bargaining power by leveraging their existing tenant portfolios. In tier I cities, Beijing’s Wangjing submarket saw a considerable amount of net take-up from IT companies, while in Shanghai, leasing demand in the undersupplied Luijiazui CBD spilled over into Nanjing West Road in Puxi. Domestic occupiers remained the key driver of office demand. MNCs remained cautious about expanding in tier I cities but showed a mild recovery of demand in some tier II cities. Sector-wise, financial and business service companies continued to drive the market. With Grade A office rents in some tier II cities becoming more affordable, tenants such as education service providers are willing to take up space in these buildings in search of a better image. This suggests there is a more diversified base for the overall office tenant mix.
Nation-wide average office rents stayed flat, up 0.1% q-o-q. Tier I cities increased 0.3% q-o-q but tier II cities saw a marginal rental decline of 0.1% q-o-q on average. In East China, fuelled by the restored rental growth on Nanjing West Road, Shanghai’s office rent grew by 1.0% q-o-q, outperforming other cities tracked by CBRE. In contrast, a supply surge in recent quarters weighed on market sentiment in Wuxi, resulting in the sharpest rental drop among all cities. North China saw diverse trends: Tianjin and Shenyang continued to report weak rental performance but encouraging signs were seen in Qingdao and Dalian due to limited supply year-to-date. The acute shortage of supply in Beijing was alleviated owing to new supply this quarter. In South China, outdated buildings in Guangzhou’s traditional CBD were under pressure to lower rents to retain tenants, leading to a marginal rental drop of 0.3% q-o-q city-wide. In contrast, robust demand stemming from new set-ups contributed to the overall rental increase of 0.4% q-o-q in Shenzhen. Office markets in West and Central China faced milder headwinds over the last quarter. Office rents in Wuhan and Chongqing remained relatively steady, whilst the rental decline narrowed in Chengdu and Changsha due to high net absorption.
A large development pipeline is still expected in the coming quarters. New supply is expected to exceed 400,000 sm in each individual city, including Shanghai, Beijing, Wuhan, Chongqing and Chengdu within the next six months. Oversupply will remain a dominant theme in tier II cities, with rising competition to retain tenants. In a bid to fill up office space, landlords are likely to be more receptive to tenants with large client foot traffic such as education service providers, suggesting a far more challenging market for tenant retention. Meanwhile, more headquarters buildings owned by end-users will be completed in some tier II cities. Driven by preferred policies introduced by local governments in new CBDs, financial institutions are willing to develop/acquire office assets in new CBDs for self-use or for investment. This trend has been most evident in Nanjing’s Hexi CBD, Chongqing’s Jiangbeizui CBD and Chengdu’s Tianfu New District. The increasing supply of owner-occupied headquarter offices is likely to dilute public leasing demand, while the potential sub-leasing of shadow space will also intensify competition in leasing markets.
Prime Retail Market
Aggregate prime retail supply amounted to 1.6 million sm nation-wide in Q3 2014, up 57.9% q-o-q, but still down 36.1% y-o-y. New completions in Chongqing and Wuxi reported record highs of 496,000 and 271,000 sm, respectively. Retail demand was steady with multi-brand stores and buyer shops exhibiting high enquiry levels. Lifestyle consumption-related sectors remained active. The average vacancy rate edged down 0.3 ppt to 8.6% nation-wide. As a result of limited leasable space and robust demand in tier I cities, the average vacancy rate dropped by 1.2 ppts q-o-q, the sharpest decline in the past three years. Tier II cities, by contrast, saw a mild uptick of 0.1 ppt q-o-q owing to tenant mix adjustment and lower-than-expected occupancy rates in the shopping centers that opened ahead of schedule. Nationwide, overall retail rents increased by 0.4% q-o-q.
Against the backdrop of the rapidly changing retail landscape in China, the focus of retailers, which used to be on expansion and store upgrading, has now turned to the exclusiveness of product offerings. This trend was most evident in the increasing numbers of multi-brand stores and buyer shops rapidly branching out into tier II cities. Several cities, including Beijing, Chongqing, Chengdu and Qingdao, saw new entries by multi-brand stores such as ATTOS, Maria Luisa and SPIGE. They also remained popular options for designer brands that are unable or unwilling to launch individual shops; D2C, which expanded to Hangzhou and Chongqing this quarter, was one such designer platform. This rapidly copied retail model has gained popularity among small-sized retail venues, leading to better access to a rich assortment of brands that have limited retail capacity.
Fast fashion brands continued to expand in decentralized areas and remained a key occupier for shopping malls. Earlier entrants, such as Zara and H&M, have established their footprint in a number of tier II and tier III cities, while new brands, including Forever 21 and New Look, have rapidly expanded their networks to new cities. Forever 21 made its West China debut in Chongqing this quarter and also expanded to Wuxi and Hangzhou. New Look opened more shops in Shanghai and Suzhou and also entered Tianjin. Monki and COS, both H&M diffusion lines, debuted in Chongqing, while H&M Home set up in Tianjin. Old Navy, a diffusion line of Gap, opened its second shop in Shanghai. Inditex Group’s diffusion lines, Bershka and Zara Home, also opened new stores in a number of cities. More fast fashion brands are also setting up their e-commerce platforms. H&M launched its self-developed online platform in September. Zara, along with Massimo Dutti, and New Look all debuted on Tmall.com, the leading B2C platform in China. UNIQLO’s sister brands, Comptoir des Cotonniers and PRINCESSE tam.tam, launched online shops on Taobao.com. Topshop, a British brand, debuted in China with an e-tailing store on Shangpin.com.
In the face of increasing competition from e-commerce outlets, brick-and-mortar shopping malls have responded by offering a higher proportion of stores related to lifestyle retail. F&B, experiential shops and recreational facilities have been particularly popular. The recent opening of Apple Stores in tier II cities and the debut of the Mars Retail Group’s M&M’s World store in Shanghai have attracted strong attention from consumers and the media. Their appeal is based on a shopping experience that combines service, brand culture and product offering. Fashion brands are also focused on improving the customer shopping experience. During the quarter, Hermès opened its fifth global Maison Hermès store in Shanghai, reflecting the importance of the client shopping experience to the luxury giant. In addition, more fashion retailers shifted their focus from expanding their businesses to enhancing customers’ shopping experience. A number of mid-range retailers have introduced casual dining and rest lounges at the expense of floor space for product displays in their stores. During the quarter there were more cases of business closures or the upgrading of department stores in several cities such as Beijing, Guangzhou, Qingdao and Chongqing. Following competitors such as Wangfujing in North China, Intime in East China and MOI in South China, the Chongqing Department Store in West China opened its first ever shopping mall project this quarter. Apart from bringing in more lifestyle retailing, the reconfiguration of the physical store is also high on the agenda for department store operators. The strong development pipeline is a common trend in most retail markets in China. A number of cities are each expecting over 500,000 sm of new supply in 2015. Large-scale shopping centers featuring a one-stop consumption experience are opening, while more department store, hypermarkets and specialty store operators, such as Suning and IKEA, have launched shopping malls in response to the changing appetites of consumers.
Industrial Logistics Market
The period saw the completion of new supply in a number of cities including Shanghai, Chengdu and Guangzhou but logistics supply remained tight in most markets. Demand was resilient with 3PLs most active. S.F. Express and NYK secured 90,000 sm and 15,000 sm, respectively, in the newly-delivered Phase II of the Blogis Logistics Park in Guangzhou. Meanwhile, Jincai Logistics leased 65,000 sm in Shanghai’s GLP Lingang Park. Apart from 3PLs, end-users such as retailers and Auto & Parts businesses were also active. Chengdu logistics rents fell by 2.6% q-o-q due to rising supply. In contrast, Shenzhen, reported a 1.6% q-o-q increase in overall average rent due to the supply bottleneck and implementation of preferential policies.
This quarter saw the introduction of a number of preferential policies regarding logistics market development. At the national level, the State Council unveiled its 2014-2020 plan for the logistics industry, highlighting the strategic role of the logistics sector in overall economic development. Aiming to develop a more efficient national logistics network, the plan is likely to stimulate the development of both high-standard and specialized warehouses for areas such as cold chains and pharmaceutical logistics. At the municipal level, Shenzhen released local measures to encourage the integration of e-commerce and logistics development. Coupled with the cross-border e-commerce initiative launched in Qianhai, also in this quarter, the logistics sector in Shenzhen is expected to remain upbeat in the long term.
On the investment front, MJQ investment, a JV between Mitsui and Mitsubishi Estate invested RMB 888 million in China Logistics Infrastructures, a wholly-owned subsidiary of Beijing Properties (Holdings) Limited. Upon completion of the transaction, MJQ owned 35% of the company. In August, GLP announced it would take a 15.3% stake in CMST Development, China's largest state-owned warehouse logistics provider. As part of the deal, GLP will also form a JV with CMST Development that is expected to invest more than RMB 3.6 billion to develop logistics facilities on land that the warehouse company already owns. These deals reflect the fact that the increasing difficulty in acquiring land in strategic locations is likely to push international logistics developers to establish strategic alliances with large domestic developers and/or 3PL firms.
Areas that have experienced short-term supply peaks are expected to see a gradual improvement in occupancy given the continued brisk demand and the government’s preferential policies. Tianjin and Lingang Industrial Park in Shanghai are examples of this phenomenon. However, the vacancy rate in cities such as Chengdu that face mounting short-term supply is likely to remain at an elevated level and rents are likely to be under pressure in the short term.
The relaxation of Home Purchase Restrictions (HPR) and developers’ proactive launching schedules helped stabilize the market this quarter. By the end of Q3 2014, with the exception of four tier I cities and Sanya in Hainan, all cities had relaxed or lifted the HPRs. Residential markets in Ningbo, Hangzhou and Qingdao have rebounded markedly in the wake of HPR cancellation, surging by 81.0%, 78.6%, and 43.9% q-o-q, respectively. Price-wise, despite the recent upturn in sales volume, the average residential price in 70 major cities in September slid for the fifth consecutive month. Meanwhile, national unsold inventory went up by 28.5% y-o-y in Jan-Sept, 3.5 ppts higher than in the first half. Inventory pressure was still observed across the nation, especially in tier III and tier IV cities. In the face of tight liquidity and high inventory, developers have had to set prices at competitive levels to drive sales volumes. This has resulted in price falls in a number of cities. Weak market sentiment, falling prices and elevated inventories mean that developers have turned more cautious towards land acquisition. Property investment growth from January to September shrank by 2.4 ppts compared to January-June. Land acquisition and new construction area also fell by 4.6% and 13.5% y-o-y, respectively. On September 30th, the PBOC reaffirmed preferential policies for first-home mortgages. According to the announcement, second home buyers who have paid off their mortgage are eligible to be considered as first home buyers when they apply for a new mortgage. This means that the down payment ratio for second homes will be lowered from the previous 60-70% to 30% for qualified second home buyers. The easing measures will likely trigger potential demand, in particular upgrading demand. In order to alleviate inventory and liquidity pressures, CBRE believes that most developers are likely to continue to offer discounts to attract prospective buyers. Coupled with policy easing at the central and local government level, national transaction volume will further recover in the coming quarters. That said, housing prices might remain under pressure in most lower-tier cities, while those in major cities with robust demand should remain relatively stable.
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.