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CUSHMAN & WAKEFIELD: OFFICE RENTAL INCREASE SLOWING DOWN WHILE INDUSTRIAL REAL ESTATE BOOMING
18 Apr, 2012, China
- Beijing and Shanghai maintain landlord’s market, while some 2nd tier cities experience vacancy rate increase
- Consumer confidence drive up retailer expansion; market positioning and tenanting takes on higher significance
- Office and retail projects remain investors’ focus; land transactions are expected to increase in tier 3 & 3 cities
- Industrial land faces higher demand, pushing the land price up in Beijing and Shanghai
After a leap year of rapid development, the commercial real estate market is starting to show signs of rationality behind the exuberance. With the central government putting more emphasis on entity economy, industrial real estate has become a hot spot for investment. According to the Q1 MarketBeat Reports by Cushman & Wakefield, the four sectors of office, retail, investment and industrial markets are showing the following trends:
Office: Beijing maintains a landlord’s market in the first quarter, with demand remaining active. The rental growth, however, has slowed down compared to last year. A total of 136,000 sq.m office supply entered the market in Q1, slightly pushing up the overall Grade A office vacancy rate by 1.5% Q-o-Q to 4.2%. While lowing their expectations for rental growth speed, the landlords have also put some reserved office space onto the market. In Shanghai, the average Grade A office rents remain stable. The first quarter saw vacancy rate rise 1% Q-o-Q to 5.8%, as expensive rents and a lack of new supply drove some core submarket occupiers to opt to relocate to some sub-CBD markets. In Chengdu, overall demand was stable, while the vacancy rate stayed on a relatively high level – 27.7%, up 0.9% from last quarter. As a result of new supply deliveries, Guangzhou experienced an elevation in vacancy rates by 5.4% Q-o-Q to 13.1%. With as much as 461,000 sq.m of new single ownership Grade A office entering the market in the near future, we expect that the market will experience a downward trend in rentals. In Shenzhen, the completion of Kerry Plaza II delivered 69,000 sq.m of high quality office space to the market, meanwhile pushing the vacancy rate up by 3.2%, to 19%.
| City | Beijing | Shanghai | Chengdu | Guangzhou | Shenzhen |
| Average Grade A Office Net Effective Rental* in Q4 2011 (RMB/Sq.m/mth) |
525 | 415 | 160.9 | 220 | 288 |
| Change (Q-o-Q) |
3.6% | 0.2% | 3.3% | 1.9% | 7.5% |
Daniel Wang, Executive Director of Corporate Investors & Occupiers Services for Cushman & Wakefield China, commented, “2011 witnessed rental increase in major 1st and 2nd tier cities. We expect the demand to continue increasing, particularly under the circumstances of rapid urbanization. In Beijing, the market will return to a more rationalize status, with slower rental increase. As Shanghai positions itself as an international financial and shipping center, the demand will remain active with new submarkets becoming an alternative choice for corporate occupiers. Some 2nd tier cities such as Chengdu and Guangzhou will experience considerable pressure for absorption due to an influx of supply.”
Retail: Despite China set the targeted economic growth at 7.5% this year, the lowest in 8 years, the government is still determined to boost domestic demand and promote consumption. Major 1st and 2nd tier cities remain the target battlefield for international retailers, driving up the demand for high quality retail space. Some key retail projects in Beijing and Shanghai are currently looking at upgrading their brand mix to better meet consumers’ needs.
James Hawkey, Executive Director of Retail Services for Cushman & Wakefield China, said, “With the population of China’s middle class growing, international retailers are speeding up their expansion plans in China, leading to more demand for retail space. Supply is increasing rapidly, and inevitably some cities will face a measure of oversupply in the coming 1-2 years, further highlighting the need for strong market positioning and sophisticated leasing strategies.”
Investment: More and more developers are facing increasing pressure of capital raising, which will result in a likely scenario of owners placing some existing projects. Offices in Beijing and Shanghai remain a hot spot for investment, while retail markets in 1st and key 2nd tier cities are also a focus for institutional investors.
Jack Ye, National Director of Investment & Capital Markets, commented, “The controlling regulations in the residential sector continue making the office and retail properties appealing for investment. The huge potential , unprecedented market opportunities, together with rapidly growing investment demand, is making China a more and more attractive destination for overseas investors. We expected to see more offshore funds investing in real estate projects, and also an increase in land transactions in 2nd and 3rd tier cities. Some RMB funds will also look for projects to purchase.
Industrial: With the central government encouraging more entity economy investment, industrial real estate is gaining more appeal in core cities. With the emergence of some major e-commerce companies such as 360buy and Suning, the demand for logistics and storage warehouses is souring. The availability of a reliable supply chain, high-quality infrastructure, sophisticated market and overall ease of business, particularly when compared to the conditions of other Asian markets, makes China an outstanding manufacturing hub in the region. However, the growing labor cost is becoming a concern. Soaring Land prices in China are another unique trend. The price of an industrial land in Beijing and Shanghai could be 5 to 10 times higher than 4 or 5 years ago.
Peter Zhang, director of Industrial Consulting for Cushman & Wakefield China, commented, “China’s industrial real estate is going to experience soaring demand and price, especially in Beijing, Shanghai, Chengdu, Shenzhen and Chongqing. Well planned and facilitated industrial parks will in high demand.”
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