Market Insights Market Insights

    Issue 013: 25 July 2012

    An Overview Of 10 Office Markets In China: Part II

    We bring the spotlight to the performance of the office sector in 10 selected cities in China. Part II covers Hangzhou, Shanghai, Shenzhen, Tianjin and Wuhan.

    Shanghai seems a promising investment destination, with rental appreciation forecast to continue and even advance despite the expected slowdown in the Chinese economy.

    However, Shenzhen is expected to see the market soften as yields, capital values and rents stumble in the face of a weakened domestic economy and continued global economic concerns.

    The Tianjin market is moving towards securing long-term returns, as more developers seek to develop and manage lease-only projects. This may curb opportunities for institutional investors such as REITs.

    HANGZHOU: With the addition of the 60,000 sq m International Sunyard in the Binjiang area, total Grade A office stock increased to around 1.7 million sq m as at end Q1 2012. Despite the new supply, city-wide vacancy still recorded a decrease due to stronger leasing demand in prime CBD areas. Net take-up amounted to 59,200 sq m, with the bulk of the demand coming from private domestic companies in the financial and IT industries.

    Leasing demand remains healthy with the city-wide vacancy rate falling 1.0 percentage point (ppt) to 26.8%. This caused Grade A office rents to increase by 2.0% q-o-q to an average of RMB 135.4 per sq m per month.

    SHANGHAI: Approximately 721,000 sq m of new supply will enter the Shanghai Grade A office market this year, representing the largest annual supply in the sector since 2008. High pre-commitment levels have been registered for the majority of this projected supply, supporting views of demand remaining strong throughout 2012.

    The Chinese economy is expected to experience a slowdown, but its growth will still outpace much of the world, shoring up office space demand. As a consequence, city-wide vacancy will remain under 10% till mid-2013, helping rents appreciate to the tune of 11.5% in 2011, and improving in subsequent years.

    In turn, continued rental appreciation will further encourage demand in the city's burgeoning Grade A strata-title market, a market in which potential buyers - almost exclusively domestic - will have several options to choose from with the allocation of strata-titled sales in a number of upcoming projects.

    Finally, expected appreciation of the yuan against the US dollar and favourable market conditions will boost the interest and presence of overseas institutional investors in Shanghai.

    SHENZHEN: Yields and rentals are expected to soften as developers focus on securing take-up for eight new projects slated to enter the market in 2H 2012, adding 470,000 sq m of new supply.

    The vacancy rate lowered in the first half of the year, due to a lack of new supply and positive demand. However, if the new space released in 2H 2012 does not find tenants - a real possibility given indications of a slowing domestic economy and renewed global instability - landlords will be forced to lower their asking prices, bringing down rentals throughout the city. In addition, a projected downward trend in capital values will cause yields to soften.

    TIANJIN: Only 54,500 sq m of Grade A office space - part of the Golden Valley Centre mixed-use project in Haihe Riverside - will enter the market this year. Approximately 46,000 sq m will be for lease with the remainder allocated to strata-titled sales.

    Although developers are releasing portions of their projects to the sales market to help with cash flow, a growing number are seeking to develop and manage lease-only projects as a means to move up the value chain and secure long-term returns. This will stimulate rental appreciation.

    However, as more developers jump on the bandwagon, the additional supply will likely to lead to a fall in occupancy over the next two to three years. This will cause rental growth of existing projects to be kept in check.

    WUHAN: Strong leasing demand and higher asking rents from newly launched spaces drove city-wide average rents up by 11.8% q-o-q in Q1 2012 to RMB 86 psm per month.

    The Grade A office market is facing a sharp increase in supply in the form of new projects including Corporate Centre 5, Ping An International Finance Tower and Wuhan Wanda Centre, which together added a total of 173,900 sq m to the market.

    With the influx, the overall availability ratio increased to 27.2%, the highest level since 2005. However, the Grade A market witnessed significant take-up in Q1, with overall net absorption reaching 53,000 sq m, almost equal to the take-up for the whole of 2010.

    With a further increase of 100,000 sq m of new office space expected, Wuhan's availability ratio will widen further. In response to the rising pressure from large office supply, city-wide office rental is expected to mildly decrease in order to maintain occupancy rates.

    The data presented in this issue of Market Insights was drawn from published reports by Savills and DTZ.
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