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Commercial Real Estate Sees Positive Performance, Further Growth Expected
19 Apr, 2011, China
Chinese real estate market has gone through a year of stringent controls in 2010. In the first quarter of 2011, the commercial property market in China witnessed new highs in the office, retail, industrial and investment markets. In the first two months of 2011, total volume of investment in real estate development grew by 35% year-on-year. Despite the government’s tightening control of the property market, the pace of the real estate development in China is still accelerating. Echoing Cushman & Wakefield’s prediction in 2010, more and more investors and developers are turning to the commercial real estate sector.
According to Cushman & Wakefield’s Q1 MarketBeat reports on office and retail in Beijing, Shanghai and Chengdu, the office market delivered positive results in the first quarter of 2011. Office rentals saw stable growth in both Beijing and Shanghai due to limited availability of high-quality office space and the growing market demand. In the retail sector, the combined factors of the strong macro economy and increasing purchasing power continue to heat the retail market up. The market is seeing a lot of investment flowing into the commercial real estate sector, among which domestic institutional investors are playing a bigger role. In 2011, the industrial property market is expected to maintain its positive growth due to limited supply and strong demand. Such trend can be easily spotted in Beijing, Shanghai, and Chongqing.
According to Cushman & Wakefield’s quarterly research, China has delivered another quarter of strong rental growth with both international and local demand remaining healthy. We note the following trends:
– OFFICE: Rentals maintained an upward trend due to the limited availability of high-quality office space. In Beijing, the growing demand and limited quality office space drove up the average net effective rental of Grade A offices to 322 yuan/sq.m/mth. We are beginning to see a growing demand from domestic companies, which account for a large share of the absorption in Beijing. In Shanghai, both domestic companies and MNCs are showing strong interest in high-quality office space. The average net effective rental of Grade A offices reached 363 yuan/sq.m/mth, once again topping the mainland China’s office market. As one of the fastest-developing cities in China, Chengdu’s office market remained active in the first quarter, and with some large office projects entering the market, Cushman & Wakefield predicts an increase in office vacancy rates.
Andy Zhang, Managing Director of Cushman & Wakefield China, commented on the future prospects of the office market, “The unprecedented fast pace of urbanization and continuing economic development will drive up the demand for commercial real estate in China. The improving infrastructure in Chinese cities will also provide MNCs with more options for their development strategies in China, as well as in the whole of Asia. On the other hand, the office markets and industrial parks near the key cities will also benefit from the development. They will become an attractive low-cost solution for companies to locate their back offices, such as R&D centers, data centers, and call centers.”
– RETAIL: In the first quarter of 2011, concrete macroeconomic recovery enhanced consumer confidence and drove retail sales up. During the Spring Festival, total retail sales in both Beijing and Shanghai experienced new hikes, while the overall retail vacancy rates decreased. In Beijing, the rentals for prime retail space remained stable in the first quarter. In Shanghai, due to the expansion of some international retailers, the demand for prime retail space peaked. It is expected that the market will be able to quickly absorb the new supply that is to enter the market in 2011. In Chengdu, a few large projects will enter the market in 2011, and at the same time, international brands are continuing to speed up their expansion plans in Chengdu.
James Hawkey, Executive Director of Retail of Cushman & Wakefield China, commented, “In Beijing’s retail market, Gap is the latest major international retailer to enter Beijing, with two stores now open. A broad range of retailers are actively expanding. However, supply is increasing more rapidly still, and there are some signs of high levels of supply leading to vacancy and even project failures, in Zhongguancun and in the Ya’Ao area in particular. In Shanghai, the market overall remains strong, supported by strong demand from major international retailers. The market is waiting for the opening of a number of key projects over the coming 12 months including Metropolitan, Park Place and Citic Plaza.”
Discussing the retail market in Chinese 2nd tier cities, he added, “Elsewhere in China, secondary cities have become a focus for major international retailers. In Chengdu for example both Zara and H&M entered the market in 2010 and now have two stores each, with a third H&M opening shortly. Chengdu is typical of major secondary cities with a wide variety of major shopping centers now coming to the market. After the completion of Galleria at the end of 2010, Chengdu is now awaiting its first Raffles City and MixC, both due for completion in 2012. While development of the Chengdu market is relatively healthy at present, as in many secondary cities, there is a danger of oversupply in some locations, as a large number of mega-malls are completed in a very short timeframe.”
– INDUSTRIAL: Industrial real estate rentals in Asia jumped over 5% last year, in contrast to the rest of the world where the occupational market deteriorated in the majority of markets, according to Cushman & Wakefield’s Industrial Space Across the World 2011. The report, which monitors rents and total occupancy costs in 53 countries, reveals that Jakarta, Beijing and Singapore performed very strongly in 2010. In the world’s fastest growing industrial locations 2011, rents in Beijing surged by 18% in 2010, running 2nd in the ranking, following Greater Jakarta area in Indonesia, by 21.7%.
Andy Zhang, Managing Director of Cushman & Wakefield China operations, commented on the China market, “In 2011, the industrial property market will maintain its positive growth due to limited supply and strong demand. Such trend will easily be spotted in cities such as Beijing, Shanghai, Chengdu, Shenzhen and Chongqing. In the meantime, the Chinese government is applying tighter control on total industrial space distribution. But various investments, especially those related to domestic demand, will be increasing. This trend will last for a period of time in the future.”
– INVESTMENT: Due to the government’s strict control on residential real estate, a lot of investment entered the commercial real estate sector, especially in some 1st and 2nd tier cities where residential is facing tightening restrictions. Cushman & Wakefield predicts that as the restriction continues in the residential sector, more domestic and foreign investors will fasten their pace into the commercial real estate, which was well demonstrated in SOHO’s recent 5 purchases of commercial projects in Shanghai. As the economy continues to recover, the demand for commercial property will surge, fueling the investment in the commercial real estate sector. In the last 6 months, the investment team of Cushman & Wakefield, led by Jack Ye, head of Investment, has successively closed 3 transactions, totaling more than RMB4 billion yuan.
Jack Ye, National Director of Investment, Cushman & Wakefield China, said, “The investment in China’s real estate market will remain active in 2011. China is a prime target market for foreign institutional investors. Take Shanghai, excluding land transactions, there were 7 transactions in Q1, totaling RMB4.6 billion. Among them, 50.4% of them are domestic investors, including those from Taiwan and Hong Kong, while foreign investors take 49.6%. In the transactions market, office takes 44.5%, mixed use 22%, retail 12.5% and hotel 21%.
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