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CHINA’S COMMERCIAL REAL ESTATE ON THE FAST TRACK, 2012 TO SEE A MORE VIBRANT MARKET
11 Jan, 2012, China
With the stringent control from the central and local governments in the residential sector continuing, the space for investment and speculation in the residential sector is getting tight. However, as the inflation remails high, real estate is still one of the prime choices for investors. 2011 saw a vibrant commercial market in China, with a large number of projects entering the market or putting more emplasize on the commercial sector. Investors, corporate occupiers, and individuals are all showing interest in the cimmercial property market. We note the following trends:
Office: In Beijing, high demand and limited new supply pushed the market more towards a landlords' market, with the Grade A office vacancy rate in Q4 2011 decreasing to 2.7%, the lowest in the last decade. Starting from Q3 2011, Beijing knocked Shanghai off the top spot as the city with the highest Grade A office rental in China. The new Grade A supply in 2012 will total about 5550,000 sq.m, still staying at a relatively low level.Q4 saw Shanghai's overall Grade A vacancy rate decrease to 4.8% from 7.0% in Q3. Demand for space was driven mainly by cash-heavy state-owned companies as well as tenants from the financial, pharmaceutical, high-tech and consultancy sectors. In Chengdu, 4 Grade A office projects entered the marked in 2011, adding 223,000 sq.m to the stock. The city is expected to see another 1 million sq.m Grade A office space come onto the market in 2012, which will double the office stock and put some pressure on the absorption. We expect to see a slight to moderate increase in the vacancy rate. Guangzhou's office market remained active throughout 2011 and 2012 will be a year with heavy new supply entering the market, which will likely push the overall vacancy rate up. In Shenzhen, the optimistic economic prospects continue to push up the demand for high-quality office space, with rental maintaining the upward trend. We expect that this trend will be reinforced in 2012.
*Net Effective Rent is calculated based on net floor area and assuming a letting to a multinational tenant occupying mid floors for a typical three-year lease term with rent-free periods factored in.
Daniel Wang, Executive Director of Shanghai and Eastern China for Cushman & Wakefield, commented on China's office market, "We saw an upward trend in the rental in most first and second tier cities in 2011. The unprecedented urbanization process in China and strong economic growth will continue to drive up the demand for commercial real estate. The improving infracture will also offer more and flexible options to international corporate occupiers when choosing the office and industrial space. Beijing and Shanghai have relatively mature and international office markets and will be the most dynamic markets in China. With more companies moving towards the inland, Chengdu, Chongqing, Shenzhen and Guangzhou will become the central markets in the Western and Southern regions. We expect Beijing and Shanghai to maintain the landlords' market position in 2012, but the rental growth will slow down. However, some second tier cities like Chengdu and Guangzhou will face some pressure absorbing the large amount of new supply in the coming year."
Retail: The overall optimistic economic prospects will continue to sustain the consumer confidence, while the growing purchasing power will also push forward the development of China's retail market. Due to European debt sovereign debt crisis and the uncertainities that emerged in the US economy, China is becoming a favourable destination for international retailers. In terms of rental, the prime retail space in Beijing experienced a slight increase in the rental in Q4 and a similar trend can be spotted in Shanghai with internationl retailers expanding in Shanghai, pushing the prime retail rental up. Although Shanghai is expected to see an influx of new retail supply in 2012, the strong demand is likely to absorb a considerable part of it. According to Cushman & Wakefield's latest research, around 22 big retail projects, each of which will add more than 50,000 sq.m of retail space (GFA), will enter the Chengdu market in the next two years. The foreseeable large amount of new supply will push the vacancy rate up.
James Hawkey, Executive Director of Retail Services, said, "The growing Chinese middle class, armed with impressive purchasing powers, will continue to attract international retailers, who have shown great interest in high-quality, well-planned and managed shopping center space. For developers and investors, this means increased risk, along with good returns for the projects that perform well; for retailers, this means slowing rental growth and potentially in some cases, opportunities to secure lower rentals, together with increased risk associated with site selection.
Investment: Influenced by the government's strict control on the residential sector, the market has been seeing a capital flow to the commercial real estate sector, especially in some tier 1 and tier 2 cities where strigent regulation and control measuers are still in place. With global economic uncertainities mounting, China remains a pre-eminent market for global property investors. IN the past 12 months, the investment team of Cushman & Wakefield China, led by Jack Ye, National Director of Investment has successively completed several transactions in the year of 2011, totaling more than RMB 6.5 billion.
Jack Ye said, "With the government control on the residential sector continuing to tighten, real estate developers are beginning to experience difficulties in funding, which will lead to mor epropertis going for sale in the market. We are seeing an increasing appetite for high-quality projects in prime locations, as well as for retail properties in tier 2 and tier 3 cities. 2012 will be a year of M&A in the investment sector, and a lot of companies might experience a true '2012' situation."
Industrial: The industrial real estate market continues to heat up with the demand soaring in some coastal regions. The rapidly-developing online retail is also a driving force for the warehousing logistic industry. Peter Zhang, Director of Industrial Consulting for Cushman & Wakefield, commented, "2012 will be a prosperous year for industrial property. Well-suited and well-managed industrial parks will be welcomed by the market. We will continue to see an industrial market with increasing demand and rising rental, especially in big cities such as Beijing, Shanghai, Chengdu, Shenzhen and Chongqing."