Jan 5, 2016
Leading global commercial real estate services firm Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) held a press conference today in regards to 2015-2016 China Real Estate Market Review and Outlook. Collier has made in-depth analysis on major cities’ real estate market performance in 2015 and future development trends in 2016, including office, retail, residential and industrial property markets.
China Property Markets
China’s office real estate market continued to expand rapidly in 2015 in most major cities, with 57 new projects completed in 14 major cities during the year. However, the market’s performance diverged noticeably in 2015, with first-tier cities achieving rental growth and low vacancy rates while many second-tier cities faced concerns about oversupply. In Shanghai, investors were extremely active, with 38 transactions completed (totalling more than RMB65.4 billion), a record high in both number and value. Finance, IT and internet-related companies drove the majority of new demand in 2015, and this will continue in 2016, as several cities nurture these industries. Second-tier cities may struggle with the rapid development of their Grade A office markets, which will outpace current levels of demand in the short term.
In the retail real estate market, the divergence was between traditional catchments and emerging areas. Both domestic and international brands continued to expand in China’s retail real estate market, or enter for the first time, and demand was strong for space in prime areas. At the same time, ,most cities saw a major expansion in the retail real estate market outside their traditional catchments during 2015, as developers targeted young workers and families with neighbourhood shopping centres. Changing shopping patterns, e-commerce and oversupply in certain cities were all concerns for both landlords and retailers during the year, and they responded with a number of changes in 2015. These trends will all continue in 2016 as China’s shoppers become more sophisticated and the population in suburban areas grows.
China’s residential real estate market was divided by policy: first-tier cities maintained restrictions to guard against speculative investment while second-tier cities have removed such restrictions since 2014. Shanghai and Shenzhen both witnessed their strongest years since 2009, as the Central Government encouraged growth through multiple cuts to the benchmark interest and other stimulus measures, and the municipal restrictions steered demand towards self-use and upgrading. The high-end and luxury residential markets continued to grow in first-tier cities, as many individual property owners upgraded. No major policy change is expected in 2016, given the public support for this sector from high-level government officials.
The logistics real estate market was driven by growing retail consumption in 2015, and attracted several major investments and significant fund-raising. Tight land availability continued to be an issue, though new supply was added in Shanghai and Shenzhen this year. Rents in all first-tier cities continued to grow, supported by strong demand from the third-party logistics, automotive, retail and e-commerce industries, and fast growth in the cross-border e-commerce sector. This trend is expected to continue into 2016, and investors will continue to be drawn to the relatively high yield of this market compared to other property types.
East China Property Markets
The Shanghai CBD Grade A office property market received 10 new completions with a combined office GFA of 380,500 sq m in 2015, supported by demand from domestic firms from the finance sector. Echoing the strong demand, rental performance remained buoyant. The Shanghai investment market was very active in 2015, with the completion of 38 major transactions totalling RMB65.4 billion, the highest annual transaction value and volume recorded to date. In the city’s retail market, new supply was strong in emerging areas. Seven new shopping centres opened within the year, adding 502,650 sq m to Shanghai’s total stock. The market continued to shift away from luxury brands and towards mass-market and fast fashion, as well as sectors that offer an experience, such as restaurants, children’s play areas and cinema.
Both supply and demand were strong in Shanghai’s business park property market with sixteen new projects completed in the year. The overall vacancy rate dropped by 4.0 percentage points YOY to the lowest level in the past ten years. The investment market was quite active, with 12 en bloc sales transactions closed during the year. Although China’s industrial economy remained soft in 2015, Shanghai’s logistics property market remained resilient and seven new standard logistics properties were completed. The average vacancy rate advanced moderately, and the investment market for industrial properties continued its strong momentum, with notable investment and expansion activities from global developers and institutional investors. As a number of government-led stimulus polies were implemented in the year, the sales volume of Shanghai’s residential property market surged by 47% YOY to the highest level in the past five years. Meanwhile, demand was particularly strong in the high-end residential and luxury markets.
New supply slowed in most tier-II cities during 2015. Suzhou, Hangzhou, Nanjing, Wuhan and Xiamen received a total of 787,000 sq m of office GFA at 17 completions. Except Wuhan and Nanjing, other cities all witnessed decline in the vacancy rate. The average rent was pulled down by concerns about oversupply in most cities. In the year, the five cities saw 16 new completions, with a total of 1.79 million sq m of retail GFA. Driven by stable demand, vacancy rates in these second-tier cities averaged 7.3%, up 0.56 percentage point YOY. The average rent declined in most cities, given the decentralised location and corresponding below-average rent of the new supply.
Looking forward, nearly one million sq m of office GFA is scheduled to complete in Shanghai’s CBDs in 2016. This is expected to exceed demand significantly, based on average annual net absorption levels in recent years, and will lead to a surge in the overall vacancy rate. At the same time, decentralised market will also see a large amount of new supply, and consequently the average rent for the city’s CBD Grade A office property market is expected to remain relatively flat in 2016. In the retail property market, most of the new supply will be located in non-prime retail areas, which is forecast to pull down Shanghai’s average ground floor fixed rent in 2016. Given the strong leasing demand and improving building quality, the average rent of Shanghai’s business park market is expected to continue to grow. In the industrial property market of Shanghai, the strong new supply is expected to lead to an increase in the average vacancy rate, particularly in Puxi market, and will exert downward pressure on the rent growth. In 2016, demand is expected to remain strong in the city’s residential property market, particularly in the high-end and luxury markets. In tier-II cities, as office and retail property markets will see a large volume of new supply in the future, a spike in the overall vacancy rate is inevitable and the rent is expected to drop in all cities.
Carlby Xie, Director of Research, Colliers International China, commented that investment activity was active in East China Grade A office market in 2015 and the real estate market performance outstripped expectations. He also forecasted that the sentiment of investors will remain positive in 2016.
About Colliers International
Colliers International Group Inc. (Nasdaq:CIGI) (TSX:CIG) is a global leader in commercial real estate services with more than 16,300 professionals operating from 502 offices in 67 countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals' Global Outsourcing for 10 consecutive years, more than any other real estate services firm.
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