July 4, 2016

Office – Vacancy Down Despite New Completions

Guangzhou’s GDP grew by 8.0% YOY in the first quarter of 2016, an acceleration of 0.5 percentage points from the same period of 2015, outpacing the national (6.7%) and provincial (7.3%) level. Three new projects completed in the first half of 2016, adding approximately 214,000 sq m of supply to the city’s Grade A office stock. Supported by the stable economic fundamentals, Guangzhou’s Grade A office real estate market was active, and the vacancy rate declined by 1.4 percentage points HOH to 14.3%, despite the new supply.

Demand continued to come from finance, trade, IT and professional services sectors, and was concentrated at the new projects. An increase in building specifications and contracted rental growth in projects in the Pearl River New City submarket led the average rent to increase by 1.9% HOH or 2.3% YOY to RMB158.3 per sq m (psm) per month.

Guangzhou’s office investment market picked up during the first half of 2016 with investment activities announced both in the Pearl River New City CBD and the emerging Panyu District. Corporate and institutional investors began to seek opportunities in Guangzhou, evidenced by Hua Insurance’s purchase of ten floors at Poly Clover Plaza and Ctrip’s acquisition of five floors at Noble Center, respectively.

No major signs of a slowdown in Guangzhou’s service sector have been seen, and its continued growth will underpin the city’s office market in the second half of 2016. However, a total of approximately 410,000 sq m of new supply is scheduled to complete in H2 2016, which is expected to push up the average vacancy rate. Notably, new supply in the Pazhou submarket will be almost double the current stock in this area, reflecting an expansion of Guangzhou’s office real estate market across the Pearl River. Rents are expected to grow moderately as a result of new completions in H2 2016. The average capital value is expected to increase, leading to a stable yield.

Retail –New International Brands Expand into Guangzhou

Guangzhou’s total retail sales of consumer goods grew by 8.5% YOY during the first four months of 2016, a deceleration of 2.5 percentage points from the same period of 2015, according to the Guangzhou Statistics Bureau. Panyu AEON Mall, with a total GFA of approximately 70,000 sq m, opened in the first half of 2016, leading Guangzhou’s total retail stock to increase to approximately 3.72 million sq m. CapitaMall Sky Plus and Parc Central started trial operations and reported high pre-commitment rates.

A number of well-known brands entered Guangzhou for the first time in H1 2016, despite the slowdown of retail sales, including fashion brands Hollister, COS, French Collection, and Old Navy, as well as F&B chains Pizza Express and Stay Real Café. Landlords continued to increase their proportion of experience-related stores, as seen in the openings of Haimati Photo Studio in Sun Valley, UN Bookstore at GTLand Winter Plaza and Sisyphe Bookstore at CapitaMall Sky Plus. Active demand led the vacancy rate to decline 0.7 percentage points HOH or 0.3 percentage points YOY to 8.1% as of end-H1 2016. The average rent for ground floor property in the city’s mid- to high-end shopping centres edged up by 0.2% HOH to RMB1,067.4 psm per month. This was attributed to annual rental adjustments in existing projects, though on a yearly basis this represented a 3.4% decline. This decline is an effect of lower-than-average rent at a new project outside the prime retail area; on a project-basis, retail properties in prime areas continued to achieve rental growth, in general.

Guangzhou’s retail real estate investment market was quiet during the first half of 2016, and no major sales transactions were announced. Some institutional investors continued to show interest in the market, evidenced by the sustained inquiries and deal sourcing activities.

Guangzhou’s retail market will continue to expand in the second half of 2016, with approximately 408,000 sq m of new retail space scheduled to officially open across five shopping centres. The majority of the new supply is expected to have a mass market positioning, considering the general slowdown of retail sales for luxury brands. The new supply and continuous trade and brand mix adjustments are expected to attract new brands to the city, as seen in H1 2016. The volume of new supply will pull up the average vacancy rate, though this will be limited by the reported high pre-commitment rates at several new projects. Rental growth in the prime retail areas is expected to continue; however the anticipated below-average rental level in new projects outside the prime retail areas will pull down the city average in the coming half-year.

Residential –Sales Volume and Price Increase, New Infrastructure Plans Released

Guangzhou’s residential real estate market was active with both sales volume and average price increasing on a yearly basis in the first half of 2016. Despite Guangzhou’s strict position on purchase restrictions during H1 2016, the publication of infrastructure development plans including 11 future metro lines and loosening of tax policies stimulated the residential real estate market. In addition, banks in Guangzhou offering significant discounts on the mortgage interest rate (second only to Beijing). As a result, the average sales price and volume increased by 8.6% and 38.7% in H1 2016 on a yearly basis.

The new commodity house sales volume increased to 6.23 million sq m, while the average price increased by 2.6% HOH or 8.6% YOY to RMB15,922 psm, according to the Guangzhou Municipal Land Resources and Housing Administrative Bureau. Price growth was constrained by the distribution of house sales during the first half, with approximately 65% of the sales volume concentrated in Guangzhou’s five suburban districts, where average price registered at RMB11,779 psm by the end of the first half of 2016. Construction of metro lines in the suburban area stimulated sales, such as the second phase of of Metro Line Six in Huangpu District, the extension of Metro Line Four in Nansha District, and Metro Line Seven in Panyu District, which are all scheduled to complete by the end of this year.

Guangzhou’s residential real estate market is expected to remain active in the second half of 2016, with an anticipated boost in sales volume in the traditional sales season. Price growth is expected to be limited as developers use the opportunity to reduce inventories. However, developers have shown a positive attitude towards the long-term prospects for Guangzhou’s suburban areas, with two residential land plots in Zengcheng District sold at a premium of 164% and 178%, respectively. No major change in the government restrictions is expected in the short term, though effects of minor adjustments that allow an increased number of people to qualify as home buyers may be seen.

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