July 4, 2016

Office – Strong Demand from Finance and IT, Active Investment Market

Shenzhen’s GDP grew by 8.4% YOY to approximately RMB389 billion in Q1 2016, an acceleration of 0.6 percentage points from the same period of 2015, and according to the Shenzhen Statistics Bureau. During the same period, the proportion of tertiary industry to GDP increased by two percentage points YOY to nearly 60%. This economic growth supported demand for the city’s Grade A office property market. One new project with a GFA of 100,000 sq m was completed in Nanshan district in the first half.

Demand primarily came from domestic companies, and particularly the finance and IT sectors and the average vacancy rate declined 1.2 percentage points HOH to 10.1%. Net absorption was focused on new projects completed in the past year and totalled approximately 135,400 sq m, though this included approximately 15,000 sq m in withdrawals from financial companies in the P2P sector following stronger national regulations on this sector. Several multinational manufacturers relocated their headquarters from CBD areas to other districts with lower rental levels during this half, such as Nanshan and Bao’an Districts. This led to an increase in vacant space, especially in strata-title office buildings in Futian District. Correspondingly, several landlords of strata-title office buildings lowered both asking and transaction rents. As a result, the average rent in the city’s Grade A office property market edged down by 0.4% HOH or 2.3% YOY to RMB214 psm per month.

In the investment market, logistics developer and operator Shenzhen International Holdings purchased an office building at Sky Park in Futian District for RMB1.17 billion for self-use. The project is under construction and expected to complete by end-2016. The city’s strata-title investment market continued to be active during H1 2016, supported by several major sales transactions in Upper Hills Tower 2. In March, Bank of Shanghai and an unspecified public institute purchased a combined 24 floors at this project for RMB3.1 billion for self-use. China Pacific Property Insurance Company purchased four floors in May for RMB671 million, while China Pacific Life Insurance purchased ten floors for RMB1.678 billion in June. The project, located in Futian District, will have a GFA of 144,000 sq m when completed in 2017.

Ten new projects with a combined GFA of approximately 871,000 sq m are expected to complete during H2 2016, leading to an increase in the vacancy rate. Sixty percent of the new supply will be located in Futian District. The new supply will pull down the average rental level in H2 2016, due to increased competition and below-average rents at certain projects.

Retail – Overall Market Remains Active, with Two New Completions

Shenzhen’s retail sales grew by 8.3% YOY during the first four months of 2016, an acceleration of 6.7 percentage points from the same period of 2015, according to the Shenzhen Statistics Bureau. Echoing that fundamental, the city’s retail property market was active in H1 2016. Two new projects were completed, adding 183,500 sq m of retail space and bringing total stock to approximately 2.43 million sq m. MH Mall Phase I is located in Longhua New District, and positioned as a mid- to high-end shopping centre, with a GFA of 90,000 sq m. KK One, in Futian District, developed by Kingkey Group, targets young consumers with a mass market positioning, and has a GFA of 93,500 sq m.

Demand primarily came from F&B, fashion and entertainment brands. Several landlords adjusted their trade mix to increase the proportion of F&B and fashion brands, as seen at KK Mall and Kingglory Plaza. New supply pushed the average vacancy rate up by 0.3 percentage points HOH to 6.5%. Below-average rents at the new projects pulled down the average rent for ground floor property by 0.2% HOH to RMB907 psm per month.

No en bloc transactions were concluded in the investment market during this half. This was mainly attributed to the limited number of prime retail properties available for sale, as many landlords prefer a hold-and-lease strategy.

Demand from the F&B, fashion, entertainment and children’s care sectors will continue to be active in the following quarters, based on pre-opening commitments. Five new projects are scheduled to complete in the second half of 2016, with a combined retail GFA of 420,000 sq m. Half of this new supply (by GFA) will be located in Futian District, while other new projects will be located in emerging retail areas. High pre-commitment rates at several upcoming projects, and the completion of trade and brand mix adjustments in the coming quarters at several existing developments, are expected to limit the increase of the average vacancy rate. However, below-average rents at new properties in emerging retail areas will constrain average rental growth.

Residential – New Policies Slow Sales but Prices Continue to Climb

After an extremely active 2015, the Shenzhen government introduced increases to the minimum down payment and qualifications for non-local home buyers in H1 2016. This led to a decline in the sales volume though prices continued to climb.

In the first half of 2016, the sales volume declined by 33.1% HOH or 27.1% YOY to 23,170 units (approximately 2.43 million sq m), according to Shenzhen’s Urban Planning Land and Resources Commission. However, the average sales price increased by 95% YOY to RMB56,477 psm. This was driven by strong sales at new high-end and luxury residential projects, which can be attributed to China’s monetary stimulus in the past two years, a lack of confidence or options in other investments options in China, limited supply in Shenzhen and strong sentiment towards long-term capital appreciation for properties in China’s first-tier cities, among other reasons. At the Peninsula Phase III, developed by Nan Hai Corporation, the average sales price reached RMB102,000 psm, and the project sold 409 units in its first weekend. In contrast, several developers lowered their prices, and others delayed the launch of their projects, given the current volatility in the market.

Despite the slowdown in sales during H1 2016, developers remained confident in the long-term prospects of Shenzhen’s residential property market. This was reflected in two high-profile land sales during the half: a joint purchase by Power China Real Estate Group and China Jinmao Holdings Group of a site in Longhua New District for RMB8.29 billion, or an accommodation value of RMB56,781 psm; and Logan Group’s purchase of a mixed-use land site (including a residential component) in Guangming New District for RMB14.06 billion, or an accommodation value of RMB27,620 psm, at a premium of 160%. The average accommodation price for both transactions were record highs, and will translate into high sales prices when these residential properties are offered for sale.

While the tightened restrictions will continue to affect investment sentiment and the sales volume in H2 2016 is likely to slow compared to 2015, the average sales price will continue to grow and high-end and luxury properties will remain highly attractive given their limited supply.

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