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There may be interesting times ahead for the Mainland’s commercial real estate sector as soaring supply puts a lid on rent rises. But there are still opportunities for informed investors, according to Ada Choi, Senior Director, Asia Pacific Research at CBRE.
During her talk on the outlook for the sector at the Chamber on 7 February, Choi first focused on the office segment.
“We haven’t seen a lot of rental growth momentum,” she said. “But rents are relatively stable,” she added, noting that demand from domestic companies is expected to support rent levels. CBRE has found that more than 80% of Mainland Chinese businesses plan to increase their headcounts.
However, a huge amount of new office supply is hitting the country, with vacancy rates increasing in most markets that CBRE looked at. This is a problem particularly in second tier cities, such as Tianjin and Changsha, where high vacancy rates have led to falling rents.
“The vacancy rate level is quite scary,” Choi said. “Up to 40% in some second tier cities.”
Co-working space is a new area that has attracted a lot of attention, but Choi urged caution.
“This sector has seen very big and fast growth in the past two years, but there are still a lot of questions about profitability and sustainability,” she said, pointing to a survey that found that only about 40% of co-working spaces globally are making a profit.
In retail, the move to online shopping is continuing to have a major impact.
“This has big implications for real estate,” Choi said, noting that rental growth has not kept up with the robust growth in retail sales seen across the Asia Pacific. “Retail rental growth started to decouple in 2015. So, even if we have very strong fundamentals in the retail markets, we don’t see the retail rents moving.”
This situation is echoed in the luxury market in Mainland China, which has seen a rebound in sales of as much as 30% for some brands. “The total sales of luxury brands have continued to move up, but the store area that those luxury brands have is basically flat.”
Like with offices, retail has seen more and more new supply – especially in Shanghai and Shenzhen. China saw about 3 million square metres of new supply just last year, with 2018 expected to be another peak year. After this year, however, the supply is expected to slow.
There is also a mixed picture across the country, with some cities suffering from significant oversupply, while others have escaped the problem.
Logistics real estate is seeing a more positive impact from the online retail evolution. The Mainland China market handles more than 100 million parcels every day, creating huge demand for warehouse space. Online retailers are moving into the logistics sector and introducing changes to meet the demand for faster delivery.
“JD.com is building a fully automated warehouse in Shanghai as a test case and they are also testing the use of drones to deliver their online products in rural areas,” Choi explained.
This is having an impact on real estate demand, as increased automation needs more space, therefore fuelling demand for more warehouse capacity.
“Another major trend across China is the addition of new logistics hubs in second tier cities,” Choi said, due to the limited land supply in first tier cities.
“Rents in the logistics sector are very different from the other two sectors,” she said. “We still have some growth, and relatively decent growth, in logistics. Particularly in the Greater Bay Area including Guangzhou and Shenzhen.”
Despite the challenges in the current commercial real estate market, Choi said that she is optimistic about the sector over the long term.
“For first tier cities we like logistics. We are quite hesitant on retail unless you can find retail in good spots,” she said. “For offices, we think that over the longer term the commercial hubs will still be growing, but you have to look past the current supply peak cycle.”