Demand for commercial real estate in China’s first-tier cities started to flag in 2013. Factors such as a slowing economy and increasing competition from online sales platforms forced a dip in the retail market, while doubts over China’s economic growth potential has caused some caution in the office market. James Macdonald, Head of Savills China Research, says that despite some optimism generated by the launch of the China (Shanghai) Pilot Free Trade Zone and the Qianhai economic zone, overall the office and retail markets in China’s first-tier cities are unlikely to experience a dramatic rebound over the coming year.
2013 market overview
The office markets in China reached a turning point, with less certain economic growth weighing upon companies’ decisions on office expansions. Affordability concerns continued to plague the Beijing market, where rents have doubled in the last four years, while the Shanghai market is starting to come to terms with the surge in supply which is just around the corner. The southern markets coped slightly better, with Guangzhou, already a relatively inexpensive market compared with its first-tier city peers, managing to hold rents relatively stable, and Shenzhen receiving a boost towards the end of the year with some occupier demand being driven by expectations resulting from the Qianhai economic zone.
The retail market faced slowing retail sales, initially led by the luxury sector, but spreading to other sectors of the industry with the slowing of the economy, oversupply in certain submarkets (especially decentralised) and rising competition from online sales platforms. This has led to an increasingly two-tier market.
While economic forecasts at the beginning of 2014 are not as dire as they were at the start of 2013, expectations for a significant rebound remain remote. Optimists will point to programmes such as the China (Shanghai) Pilot Free Trade Zone or the Qianhai economic zone, as well as policy direction laid out at the third plenary session in Beijing in November; pessimists will point to unsustainable credit growth and overcapacity in certain sectors of the manufacturing industry. Demand for the office sector is closely linked to economic growth and, as such, demand prospects for the office sector remain uncertain. Expectations are that demand will remain moderate, vacancy rates will creep up as new supply enters the market and landlords will adjust rents based upon the slowing growth.
Nine new projects are expected to be completed in 2014, adding 669,000 square metres to the market. Significant supply in the face of sluggish demand is expected to result in a rise in the city-wide vacancy rate. Rising vacancy rates are expected to place more pressure on landlords to lower rents in order to secure healthy occupancy rates, especially in newly handed over projects in non-prime locations.
After three years of limited supply, the Grade A office market is expected to witness a surge starting in 2014, with nine projects scheduled to launch, adding nearly 600,000 square metres of leasable office gross floor area (GFA) to the market. Sixty per cent of the supply will be in the eastern markets, with Wangjing accounting for nearly 40 per cent of the total supply. The surge in supply is expected to result in an increase in the city-wide vacancy rate and intensified competition between landlords, forcing rents down by more than two per cent by the end of 2014.
Vacancy rates are expected to rise as five new projects, all located in Zhujiang New Town, add a combined office GFA of 687,000 square metres in 2014.
Seven buildings are expected to be launched onto the market in 2014, totalling 638,380 square metres, and increasing the Grade A office stock by 21.7 per cent, with a leasable area totalling 377,560 square metres. With limited office supply in Qianhai area, the strong leasing demand may push rents up in the city centre in 2014. Strata-title prices are expected to see some gains, as less than 100,000 square metres will be placed on the first-hand strata-title market.
An unpredictable and heavily regulated residential market, along with expectations that China will swiftly transition into a domestic-demand-driven economy, have meant that domestic developers have invested heavily in retail over the last three to four years, either as standalone projects or, more often than not, as a sizeable component of a mixed-use project. Many of these projects are beginning to be launched onto the market and are finding it increasingly challenging to find suitable tenants at reasonable rental levels given the wealth of opportunities available to retailers, along with slower sales, less aggressive retail expansion plans and competition from online platforms. Established projects in prime locations, on the other hand, are still able to sign leading retailers wanting to leverage visibility and footfall present in these projects.
Eleven projects with a total of one million square metres of retail GFA are expected to be launched onto the market in 2014. Expo (Pudong district) and Zhonghuan (Putuo district) areas will each see over 200,000 square metres of new supply. A two-tier market is starting to emerge, with well managed malls in prime locations continuing to attract tenants and shoppers, while many malls in emerging locations, apart from the best, are finding it difficult to attract suitable retailers and shopper footfall. Base rental levels at existing projects are not expected to see a major correction but some new projects may have to lower their starting rents in order to achieve and maintain higher occupancy rates. The online shopping sector will continue to grow and evolve with more creative methods for operation, promotion and even payment. This will force landlords into spending time developing more flexible tenant mixes, and the greater adoption of online technologies.
With four projects postponing completion dates to 2014 from 2013, a total of 11 projects are scheduled to open in 2014, adding 1.1 million square metres to the market and enlarging market stock by 12 per cent. Given that close to 70 per cent of the new supply will be located in non-prime or suburban districts, the rental divergence between prime and non-prime locations is expected to widen in 2014, with non-prime area landlords offering rental discounts to attract tenants, while prime projects with waiting lists should continue to see rental appreciation.
Four new projects are scheduled to enter the market in 2014, with a combined retail GFA of 488,000 square metres. The combination of substantial retail supply and retailers’ conservative expansion plans is expected to lead to rising vacancy rates, particularly in emerging areas. Rents are likely to come under increasing pressure from fierce competition between landlords for the limited pool of retailers.
Three new high-end shopping malls, totalling 280,000 square metres, are expected to launch in 2014, pushing total stock up by 13 per cent.
Savills entered the China market in the late 1980s. Through a network of offices in 13 key Chinese cities, and over 4,600 staff, they provide solutions to meet all real estate needs—commercial, retail, residential, hospitality, valuation, property management, asset management, investment, research and development consultancy, and marketing and communications.