CHINA OFFICE OUTLOOK
A Cushman & Wakefield Research Publication
2014 - 2015
CHINA OFFICE OUTLOOK
TABLE OF CONTENTS 2014 REVIEW……………………………………….3 BEIJING………………………………………………...5 SHANGHAI……………………………………………7 GUANGZHOU………………………………………..9 SHENZHEN…………………………………………....11 CHENGDU……………………………………………13 2014 INVESTMENT…………………………………15 INVESTMENT 15 OUTLOOK 2015 & 2016……………………………16 2
CHINA OFFICE OUTLOOK
2014 REVIEW
China’s economy continued to cool in 2014 and a variety of factors are likely to further constrain economic growth in the coming years. This slower expansion fuels increasing concern regarding other measures of economic health in China, such as employment, household income, consumer spending, fiscal revenue, and financial system stability. A sluggish residential real estate market, high levels of local government debt in some cities and industrial overcapacity remain major risks for China’s economy. Nevertheless, the central government appears willing to confront these challenges while pushing forward with liberalizing measures intended to unleash further growth. Despite all of this, Grade A office markets in the cities of Shanghai, Beijing, Guangzhou, Shenzhen and Chengdu generally sustained strong business demand on the back of relatively limited levels of supply.
Overall Effective Rent (Grade A), 2007 – 2014
Beijing Source: Cushman & Wakefield Research
Shanghai
Shenzhen
Q4-14
Q3-14
Q2-14
Q1-14
Q4-13
Q3-13
Q2-13
Q1-13
Q4-12
Q3-12
Q2-12
Q1-12
Q4-11
Q3-11
Q2-11
Guangzhou
Chengdu
Effective Rent is calculated based on gross 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.
Shenzhen office projects outperformed the market with strong rental growth of 11% during the year whilst elsewhere, Grade A rental levels in other first-tier markets were generally stable. Nevertheless, Chengdu rents slid by 3.8% and market vacancy rose to an unenviable 28.4%. Beijing still holds the title of the most expensive Grade A office market in China, with average rental rates finishing the year at RMB 377.5 per square meter per month, a significant 24.4% above the next most expensive market, Shanghai, at RMB 303.4 per square meter per month. Despite this rental price differential, Shanghai is still the undisputed leader in terms of premium premium-quality quality office property, being home to a substantial 1.1 million square meters of premium accommodation. 3
Q1-11
Q4-10
Q3-10
Q2-10
Q1-10
Q4-009
Q3-009
Q2-009
Q1-009
Q4-008
Q3-008
Q2-008
Q1-008
Q4-007
Q3-007
Q2-007
Q1-007
450 400 350 300 250 200 150 100 50 0
40.00%
Vacancy Rate, 2007 – 2014
35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011 2012 2013 2014 Beijing Shanghai Guangzhou Shenzhen Chengdu Source: Cushman & Wakefield Research
CHINA OFFICE OUTLOOK
Leasing was strong from sectors such as finance, manufacturing and technology and there were a number of highprofile consolidations such as Shell and JD.com in Beijing. In Shanghai, many high-profile companies such as Dentsu Aegis, Henkel and Nike consolidated or relocated to the new developments this year. Johnson & Johnson also recently agreed to consolidate and expand its office in Caohejing Office Building II.
Top 10 Office Leasing Transactions in 2014, By Size City
Property
Tenant
SQ.M.
Submarkets
Core/Emerging Submarkets
1
Shanghai
Caohejing Office Building II
Johnson & Johnson
35,943
Caohejing
Business Park
2
Beijing
China World Phase III B
Shell
30,000
CBD
Core
3
Beijing
Huitong Times Plaza
Cheetah Mobile
30,000
Other
Other
4
Beijing
Wangjing SOHO
Touch Media
23,000
Wangjing - JXQ
Emerging
5
Beijing
Potevio Innovation Park A
Home Link
22,300
Wangjing - JXQ
Emerging
6
Shanghai
The Hub
Roche
20,628
Hong Qiao Hub
Emerging
7
Beijing
Zhao Lin Plaza
JD.com
20,000
Business Development Area
Emerging
8
Shenzhen Vision Shenzhen Business Park
DJI Innovations
19,000
Houhai
Emerging
9
Shanghai
5 Corporate Avenue
Dentsu Aegis
18,781
Huangpu
Core
10
Beijing j g
FFC
Samsungg
18,000 ,
CBD
Core
Source: Cushman & Wakefield Research
4
CHINA OFFICE OUTLOOK
BEIJING
Review
2014 SIGNIFICANT LEASE TRANSACTIONS*
The Beijing office market saw reasonable levels of transaction activity and low rental and vacancy rate volatility in 2014. Annual absorption in core submarkets turned positive for the first time in three years, indicating increased office leasing activity in contrast to the previous two years. In another positive sign for the leasing market, newly launched projects in 2014 achieved healthy pre-leasing rates in the range of 50 to 70%. In Beijing's five core submarkets, the average effective rent for Grade A offices remained stable over the year, experiencing a slight reduction of 0.6% year-on-year to settle at RMB 377.5/sq.m./mo. The overall vacancy rate declined over the first half of the year due to a lack of new supply. Following this, three new projects launched to the market in the third and fourth quarters, quarters the impact on the vacancy rate was limited due to pre-leasing activity. The average vacancy rate increased moderately from the third to the fourth quarter, reaching 5.99% by year-end, a figure almost 1 percentage point lower than at year-end 2013. Among the emerging submarkets, Wangjing-JXQ is gaining popularity among corporate occupiers. The average effective rent for Grade A offices in the submarket climbed by 3.5% year-on-year, while vacancy remained l low at just 2.9%, 2 9% suggesting considerable d bl untapped d demand d d in the h area.
PROPERTY
TENANT
SQ.M.
China World Phase III B
Shell
30,000
Huitong Times Plaza
Cheetah Mobile
30,000
Wangjing SOHO
Touch Media
23,000
Potevio Innovation Park A
Home Link
22,300
Zhao Lin Plaza
JD.com
20,000
FFC
Samsung
18,000
JM Center
VW Finance
11,000
Hanwei International Plaza
Amazon
10,000
DRC Office Building
German Centre
10,000
Minsheng Financial Center
China Orient Asset Management Corp.
10,000
* Renewals are not included in leasing activity statistics
BEIJING OVERALL GRADE A OFFICE ESTIMATED EFFECTIVE RENTS**, 2003 - 2017
Outlook We expect that Grade A office rents in core submarkets will remain stable in 2015. In emerging submarkets, further supply of high-quality offices launching to the market is anticipated to support moderate rental ggrowth despite p the overall vacancyy rate increasingg slightly. g y As these emerging submarkets continue to mature this evolution will foster a decentralization trend for some businesses as their site selection strategies diversify. Business parks will become a favoured location for certain industry sectors due to their attractive rental levels, preferential government policies and comprehensive businessfriendly support services. Developers, keen to stay competitive by catering to the needs of corporate occupiers, are also becoming increasingly aware of such trends. As a result, future projects will have emphasis placed on ensuring higher rates of floor area efficiency, attractiveness to employees, and improved flexibility in office design to meet the needs of modern office tenants.
Estimated d Effective Rents (RMB B/sq.m../mo)
450
Forecast
400 350 300 250 200 150 100 50 0
**Effective Rent is calculated based on gross floor area and assuming a letting to a multinational tenant occupying mid floors for a typical three-year lease term withh rent-free f periods d factored f d in.
ABSORPTION & VACANCY RATE OF GRADE A OFFICE, 2003 – 2018
sq.m.
Vacancy Rate (%) Forecast
1,400,000 1 200 000 1,200,000
22.00%
1,000,000
17.00%
800,000 600,000
12.00%
400,000
7.00%
200 000 200,000
2.00%
0 -200,000 6
27.00%
2003
2004
2005
2006
2007
Annual New Supply
2008
2009
2010
2011
2012
Annual Absorption
2013
2014
2015F 2016F 2017F 2018F
Year-end Vacancy Rate
-3.00%
CHINA OFFICE OUTLOOK
SHANGHAI
Review
2014 SIGNIFICANT LEASE TRANSACTIONS*
In 2014, the Shanghai CBD office market saw softening rents in the Puxi area, whereas rents in Pudong’s Lujiazui and Zhuyuan areas continued to rise as availability remained scarce. The downward rental adjustment in the Puxi CBD was driven by the combined impact of both new supply coming onto the market at belowmarket-average rents, and a handful of relocations of manufacturing and pharmaceutical companies from Puxi CBD as they consolidated in suburban areas. Although the overall Grade A vacancy rate in Puxi dropped from 12.8% a year ago to 8.4% at year-end 2014, this only occurred at the cost of landlords having to offer lower rental rates. In contrast, the Pudong office market remained strong, driven partly b the by th lack l k off new supply l over the th pastt year, and d partly tl by b increasing i i demand from local financial companies. Nevertheless, a trend back to Puxi started to emerge from a number of financial services companies that relocated back to Jing’an to escape congested and expensive Lujiazui.
PROPERTY
TENANT
SQ.M.
Caohejing Office Building II
Johnson&Johnson
35,943
Th Hub The H b
R h Roche
20 628 20,628
5 Corporate Avenue
Dentsu Aegis
18,781
Henderson 688
VF Corporation
8,000
Dawning Center
HAVI Logistics
6,352
Standard Chartered Building
Feng Tai Insurance
5,000
IFC II
Hanas New Energy Group G
4,800
Garden Square
Grandall Law
4,200
The Hub
Grundfos
3,818
Kerry Center Tower 2
Guo Tai Fund
3,650
* Renewals are not included in leasing activity statistics
Outlook
SHANGHAI OVERALL GRADE A OFFICE ESTIMATED EFFECTIVE RENTS**, 2006 - 2016 400 Estimated E Effective Rents (RMB/ssq.m./mo)
Looking forward, the supply dynamic will change with a large amount of new supply coming to Pudong within the next two years, including the iconic Shanghai Tower (220,000 sq.m.) and a number of developments in the Zhuyuan area. This will likely cause Pudong rents to drop slightly, and many of these properties will come on line at less than the average rent for this locality. A similar situation will prevail in Huangpu but, conversely, Jing’an will likely see rents increasing over the next two years with strong government support, a ggrowingg p proportion p of new ppremium-quality q y pprojects j and improved transportation infrastructure. The office decentralization trend will likely continue but will remain limited to tenants in the manufacturing, pharmaceutical and IT industries, whereas companies in the key services sectors such as banking and finance, consulting, media and real estate will choose to remain in the core CBD areas.
Forecast
350 300 250 200 150 100 50 0
**Effective Rent is calculated based on gross floor area and assuming a letting to a multinational tenant occupying mid floors for a typical three three-year year lease term with rent-free periods factored in.
ABSORPTION & VACANCY RATE OF GRADE A OFFICE, 2006 - 2017 sq.m.
Vacancy Rate (%)
1,000,000
25%
F Forecast t
800,000
20%
600,000
15%
400,000
10%
200,000
5%
0 -200,000
0% 2006
2007
2008
Annual New Supply 8
2009
2010
2011
2012
2013
Annual Absorption
2014
2015F
2016F
2017F
Year-end Vacancy
-5%
CHINA OFFICE OUTLOOK
GUANGZHOU
Review
2014 SIGNIFICANT LEASE TRANSACTIONS*
GDP in Guangzhou registered 8.5% year-on-year growth in the third quarter and looks likely to settle with moderately slower growth by the end of the year, yielding an annual output of more than RMB 1 65 trillion. 1.65 trillion In 2014, 2014 Guangzhou Guangzhou’ss Grade A office supply grew by an additional 265,000 sq.m. to reach 3.2 million sq.m., an increase of 9.0% from 2013. Three Grade A office launches occurred this year: 100,000 sq.m. at R&F Yingkai Square, 86,000 sq.m. at G.T. Land Phase 4 (Tower H, formerly Tower G) and 64,000 sq.m. at Agile Centre. Job creation in the tertiary sector, particularly from local finance, insurance and IT companies, was a major factor leading to the overall vacancy level being almost halved, to reach approximately 7 9% by 7.9% b the h end d off the h year. Despite D i this hi substantial b i l absorption, b i the h average rental failed to record any significant increase, finishing the year at RMB 156/sq.m./mo. This lack of rental growth reflected an excess of supply at the beginning of the year that took time to lease up to reasonable levels.
PROPERTY
TENANT
SQ.M.
Taikoo Hui
Eyugame
5,500
A il C Agile Center t
Nik Nike
4 650 4,650
Agile Center
DHL
4,650
Onelink Center
AstraZeneca
3,000
Taikoo Hui
Consulate of the Canada
2,800
Taikoo Hui
PetroChina International
1,300
IFC
Luxiang Group
1,100
Leatop Plaza
CINS Holding
1,100
China Shine Plaza
Jiayuan.com International Ltd.
1,000
Kingboard Plaza
Avon
1,000
* Renewals are not included in leasing activity statistics
Outlook
GUANGZHOU OVERALL GRADE A OFFICE ESTIMATED EFFECTIVE RENTS**, 2012 - 2017 170.0 Estimated Effective Rents (RMB/sq.m./mo)
As a result of global and domestic economic headwinds, demand for Guangzhou’s goods and services will likely dampen in 2015, and GDP growth may continue to slip under 8.0%. In 2015, Guangzhou’s office supply is expected to increase by approximately 400,000 sq.m., largely consisting of new Grade A buildings located in Pearl River New City. Intending occupiers are likely to find great deals on offer as landlords aggressively seek to lease out new space, as well as look for pre-commitment on future projects, in advance of the spike in new supply pp y scheduled to launch in 2016 and beyond. y Rent and vacancy levels are likely to remain stable; however, landlords may increasingly use concessions in the form of longer rent-free periods to woo occupiers. Over the next five years, additional office supply pressure will come from newly emerging submarkets near Guangzhou South Station, in Baiyun District and in the upcoming International Finance City.
Forecast
165.0 160 0 160.0 155.0 150.0 145.0
**Effective Rent is calculated based on gross 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.
sq.m.
ABSORPTION & VACANCY RATE OF GRADE A OFFICE, 2011 - 2017
Vacancy Rate (%) 40%
1,400,000
Forecast
35%
1,200,000
30%
1,000,000
25%
800,000
20%
600,000
15%
400,000
10%
200,000
5%
0
0% 2011
10
2012 Annual New Supply
2013
2014 Annual Absorption
2015F
2016F Year-end Vacancy
2017F
CHINA OFFICE OUTLOOK
11
CHINA OFFICE OUTLOOK
SHENZHEN
Review Shenzhen’s GDP registered RMB 646.1 billion during the first half of 2014, with reported year-on-year growth of 8.5% during the first three quarters. Bolstered by government policies, tertiary industry is growing rapidly and now accounts for 55.8% 55 8% of Shenzhen Shenzhen’ss overall output. The southern Chinese megacity continues to develop as a hub of high-tech manufacturing and R&D, with a thriving financial sector. Overall Grade A office supply grew from approximately 1.96 million sq.m. to 2.22 million sq.m. year-on-year by the end of 2014, an increase of 13.3%. Notable additions included the launches of the Investment Bank Building in the Futian CBD submarket and SCC (Tower A) in the Houhai submarket. Annual absorption of about 122 000 sq.m. tightened 122,000 ti ht d the th vacancy rate t by b almost l t 5.0 5 0 percentage t points, down to 6.0%. The overall average rental climbed sharply by about 11.0% year-on-year to RMB 207/sq.m./mo, driven mainly by the expansion of domestic service-sector companies as well as the city’s relatively low base of Grade A office supply.
2014 SIGNIFICANT LEASE TRANSACTIONS* PROPERTY
TENANT
SQ.M.
Vision Shenzhen Business Park DJI Innovations
19,000
Vi i Shenzhen Vision Sh h B Business i P k Intel Park I l
10 000 10,000
Shenzhen Kondarl Group Traveller Automobile Group Trade-Link Supply Chain Management
NEO – Tower A Dazhonghua IFC Century Place Avic Center
3,500 3,600 1,900
GoPro
1,700
Kerry Plaza II
Glory Real Estate
1,700
Kerry Plaza II
China Agroforestry Low-Carbon Holdings
1,700
Outlook
KK100
1,200
In 2015, Shenzhen’s GDP growth will likely parallel the expected slowdown of the national economy, putting downward pressure on leasing demand. However, Shenzhen’s landlord-favorable supply imbalance – relatively limited Grade A office supply, given the city’s impressive economic status – is expected to ease this pressure, allowing for continued rental growth in 2015 even as 250,000 sq.m. of new space is forecast to launch to the market. Looking further forward, the year 2016 is projected to see a four-fold spike in new supply pp y over the p previous yyear. However,, rents mayy ppeak upp until a significant amount of this accommodation gets released. The supply boom in 2016 and beyond should eventually shift negotiating power from landlords to occupiers. We expect the further evolution of the Qianhai development zone to stimulate additional office leasing demand in Shenzhen as both domestic and multinational firms seek to take advantage of the zone’s preferential policies and growth potential.
China National Offshore Oil Corp
Century Place
Skyscanner
1,000
* Renewals are not included in leasing activity statistics
SHENZHEN OVERALL GRADE A OFFICE ESTIMATED EFFECTIVE RENTS**, 2012 - 2017 Estimated Effective Rents (RMB/sq.m../mo o)
220.0
Forecast
210.0 200.0 190.0 180.0 170.0 160.0 150.0
**Effective Rent is calculated based on gross 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.
ABSORPTION & VACANCY RATE OF GRADE A OFFICE, 2011 - 2017
sq.m.
Vacancy Rate (%) 40%
Forecast
1 400 000 1,400,000
35%
1,200,000
30%
1,000,000
25%
800,000
20%
600,000
15%
400,000
10%
200,000
5%
0
0% 2011
12
2012 Annual New Supply
2013
2014 Annual Absorption
2015F
2016F Year-end Vacancy
2017F
CHINA OFFICE OUTLOOK
CHENGDU
Review
2014 SIGNIFICANT LEASE TRANSACTIONS*
The Chengdu Grade A office market was characterized by strong activity in the first half of 2014, driven by demand from the financial sector, which contributed to over 50% of leasing transactions. Demand from private-sector financial firms was notably strong. strong However, the expansion frenzy of private financial companies slowed significantly in the third quarter and ground to an abrupt halt in the fourth quarter. Moreover, the closure of a large number of such firms in the fourth quarter returned a substantial 40,000 sq.m. or more of Grade A office accommodation to the market. In the fourth quarter, the average Chengdu Grade A office effective rent saw its fourth consecutive quarterly decline to RMB 98.3/sq.m./mo, 3.8% l lower th than th same period the i d off the th previous i year, due d t a to combination of a large amount of vacant space and subdued demand. The vacancy rate of Chengdu’s Grade A offices fell to 28.4%, 4.8 percentage points lower than a year earlier, as 231,004 sq.m. of new Grade A office launched during 2014, significantly less than that in the previous two years.
PROPERTY
TENANT
SQ.M.
One Aerospace Center
China Construction Bank
4,700
P An Ping A FFortune C Center
P An Ping A Property P & Casualty C l
4 600 4,600
IFS
Active Network
3,000
Yanlord Landmark
Sanofi
2,000
Square One
Rider Levett Bucknall
1,900
Raffles City
Fuji Xerox
1,700
Sichuan Investment Building
Xinruihe u Insurance su a c
1,700 ,7
China Overseas
JIC Trust
1,500
Raffles City
ABB
1,200
Minyoun Financial Plaza
E-House China
1,000
* Renewals are not included in leasing activity statistics
Outlook
CHENGDU OVERALL GRADE A OFFICE ESTIMATED EFFECTIVE RENTS**, 2008 - 2017 120 Estimated d Effective Rents (RMB B/sq.m./mo)
Despite the reduced level of Grade A office supply launching in 2014, an unprecedented 887,025 sq.m. of new Grade A office space is expected to launch in 2015, putting substantial upward pressure on the vacancy rate. Rental levels in the emerging Nanyanxian submarket are set to decline further as a number of pre-leasing deals indicate that new office buildings in the area are charging rents that are much lower than the current market average to secure tenants. However,, we expect p rents in the CBD,, Dongdajie g j and South District to remain relatively stable as new supply levels in these submarkets gradually declines from the peaks seen in the last two years. Office buildings developed for the purpose of sale are likely to be put on the leasing market as investors become increasingly cautious and vendors’ sales price expectations are not realized. We expect office occupiers to take advantage of lower rental rates to upgrade their office accommodation during this supply surge. This high level of relocation activity might also stimulate additional expansion activity and absorption as tenants plan for the future and capitalize on lowcost premises.
Forecast
110
100
90
**Effective Rent is calculated based on gross floor area and assuming a letting to a multinational tenant occupying mid floors for a typical three-year three year lease term with rent-free periods factored in.
ABSORPTION & VACANCY RATE OF GRADE A OFFICE, 2008 - 2017
sq.m.
Vacancy Rate (%)
1,000,000
40% 35%
Forecast
800,000
30% 25%
600,000
20% 400,000
15% 10%
200,000
5%
0
0% 2008
14
2009
2010
Annual New Supply
2011
2012
2013
Annual Absorption
2014
2015F
2016F
Year-end Vacancy
2017F
CHINA OFFICE OUTLOOK
2014 INVESTMENT
In the investment market, the central government's five-year nationwide ban (announced in July 2013) on the construction, expansion, reallocation, and purchase of office buildings by all government agencies, agencies including state-owned enterprises, started to have a major impact. This, coupled with strong outbound activity from Chinese developers, reduced the level of investment activity in completed en-bloc office investments and leveled the playing field once more for experienced foreign real estate i investors. The top three largest en-bloc office investment transactions were all from Shanghai and the largest transaction was the acquisition of Greenland Center Phase 2 by Ping An insurance, totaling approximately RMB 4.4 billion.
Estimated Yields for Office Investment, 2013Q1 - 2014Q4 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 2013 Q1
2013 Q2
2013 Q3
2013 Q4
Beijing
Shanghai
Shenzhen
Chengdu
2014 Q1
2014 Q2
2014 Q3
2014 Q4
Guangzhou
Source: Cushman & Wakefield Research
Top 10 En-Bloc Investment Deals (by Deal Size), 2014 1. Shanghai
Buyer: Ping An Insurance Seller: Greenland Group
Ltd JV Eastlake Corp JV Shing Kwan Group JV Universal Global Invest Ltd JV Pearlking Developments Ltd JV Smoothly Buyer: SIUD JV Nan Fung Group Capital Ltd JV Multi-United Seller: Huntington Development Investment Inc
3. Shanghai g
4. Shanghai g
Sky SOHO US$496,217,640
Harbour Ring Plaza US$704,203,077
Buyer: Brookfield Asset Mgmt Seller: Shui On Land Limited
Buyer: Ctrip Seller: Soho China
Buyer: Oceanwide RE Group Seller: Hutchison Whampoa
6. Shanghai
7. Shanghai
8. Beijing
Buyer: Brookfield Asset Mgmt Seller: Shui On Land Limited
Buyer: Brookfield Asset Mgmt Seller: Shui On Land Limited
9. Shanghai
10. Guangzhou
BBuyer: Curafund C f d Seller: China Calxon Group
BBuyer: Fantasia F i Seller: Shenzhen Hai Gu Zhou Property Development Co Ltd JV TCL Corporation
Greenland Center 2 US$704,203,077
Corporate Avenue 2 US$515,940,589
Beijing
Shanghai
Guangzhou
The HUB US$419,029,721 US$419 029 721
JKC Financial Center US$289,834,725
Source: RCA and Cushman & Wakefield Research 15
2. Shanghai
Shanghai Mart US$579,300,000
Corporate Avenue 1 US$327,180,988 US$327 180 988
g 5. Shanghai
Pacific Century Place (Office) US$303,728,646 Buyer: Gaw Capital Seller: PCPD
No. 12, 13 District of Zhongkai US$268,595,512
CHINA OFFICE OUTLOOK
OUTLOOK 2015 & 2016
China’s central bank will continue to pursue a prudent monetary policy in 2015, with a focus on targeted easing measures, to reduce volatility and ensure a soft landing after years of exceptional growth. Despite this, the real estate sector will continue to face tight liquidity as a result of such policies and this will likely lead to further consolidations and restructurings. National policy in 2015 is expected to focus on boosting domestic demand, curbing pollution, and pursuing the ambitious “One Belt, One Road” strategy of deeper economic integration with trading partners in Europe and Central and Southeast Asia. China’s authorities will also likely take measures to promote foreign direct investment (FDI) and outbound direct investment (ODI). Outbound investment flows are climbing rapidly, highlighting the growing presence of Chinese investors in global markets. Investment in office building construction recently saw a small uptick in the cities of Beijing and Shanghai, though in Chengdu, Guangzhou and Shenzhen this was more subdued. Such data suggests that certain cities could see a sustained period of high supply inventories.
Cumulative Year-on-Year Year on Year Growth Rate of Investment in Office Development, Development 2012 - 2014 200% 150% 100% 50% 0% -50% -100%
Beijing Source: NBS and Cushman & Wakefield Research
16
Shanghai
Guangzhou
Shenzhen
Chengdu
CHINA OFFICE OUTLOOK
Existing Grade A Inventory vs. New Supply, 2014 – 2017 Shenzhen
64.8%*
Chengdu
81.2%*
G Guangzhou h
76 4%* 76.4%*
Shanghai
40.5%*
Beijing
36.2%*
Sq.m. 0
2,000,000
4,000,000
6,000,000
Existing Stock Source: Cushman & Wakefield Research
8,000,000
10,000,000
12,000,000
Future Supply (2015 (2015-2017) 2017)
* Future supply as percentage of existing inventory
Across the four first-tier markets the massive supply forecast of 1.9 million sq.m. in 2015, 4.1 million sq.m. in 2016, and 4.5 million sq.m. in 2017 bodes well for tenants and puts them back in the driving seat in a number of locations. Chengdu is no exception either, with a massive 1.38 million sq.m. planned during this same th three-year period. i d
Effective Rent and Vacancy Forecast (Grade A), 2013 – 2016 Beijing
Shanghai
385
10.0%
380
8.0% 6.0%
375
4.0%
370
2.0% 0.0%
365 2013 2014 2015 2016
Guangzhou 161
15.0% 0%
320 310
30 0% 30.0% 25.0%
159
10.0%
20.0% 15.0%
157 300
5.0%
290
0.0% 2013
2014
2015
10.0%
155
5.0%
153
2016
0.0% 2013 2014 2015 2016
Shenzhen
Chengdu
215
30.0%
205
20.0%
103
50.0%
101
40.0% 30.0%
99 195
10.0%
185
0.0% 2013
2014
2015
2016
20.0%
97
10.0%
95
0.0% 2013
2014
2015
2016
**Effective Rent is calculated based on ggross floor area and assumingg a lettingg to a multinational tenant occupying py g mid floors for a typical three-year lease term with rent-free periods factored in. Source: Cushman & Wakefield Research 17
Effective Rent (RMB/Sq.m./Month)
Vacancy Rate (%)
DOCUMENT TITLE
A Cushman & Wakefield Research Publication
Chengdu and Guangzhou stand out from the crowd in terms of supply in relation to existing Grade A market inventory. Starting from a comparatively low base, the three-year supply projection for Chengdu and Guangzhou s ests that Grade A office suggests ffice inventory in ent r will ill see growth r th off as much m ch as 81% and 76% in these two t cities cities, respectively. On the back of what could be relatively modest demand, this may ultimately have a profound impact on vacancy, which in Chengdu we estimate could reach as high as 40%. Looking forward, the first major wave of new Grade A office completions is generally scheduled to launch through 2015 and will take time to impact the respective markets. Cushman & Wakefield therefore project that these high supply inventories will impact rental levels across major markets most significantly in 2016 and 2017. It is clear to many tenants with significant footprints and sophisticated occupational strategies that in China’s office markets an opportunity to restructure leasehold portfolios across the country is either here now or will shortly arrive. Those wishing to capitalize fully on this Grade A office supply bonanza are preparing strategies for relocation that are not simply driven by pricing but often have other critical motivating factors, such as: improved infrastructure, provision of air purification technology, higher-quality building materials and specifications, and improved p buildingg management g services. Such factors, coupled p with the increasingg employment p y of modern workplace strategies, will cause a significant change in the quality of work environments for a large number of office occupiers across China. From a landlord’s perspective, this is rapidly becoming a winner-takes-all market where high-quality, well-managed assets vastly outperform much of the lower-quality or aging products in the market. Those property owners that fail to observe these changes or remain inflexible in negotiations could pay a heavy price over the medium term as they watch their vacancy rate soar.
For more information, contact:
Sigrid Zialcita Managing Director, Research Asia Pacific sigrid.zialcita@ap.cushwake.com
James Shepherd Executive Director Head of Research – Greater China james.shepherd@ap.cushwake.com
Ming Lu Research Manager Beijing, China ming.lu@ap.cushwake.com
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