C&W’S TOP TRENDS REPORT SEES MASSIVE NEW SUPPLY IN CHINA’S KEY OFFICE MARKETS IN 2015 - Cushman & Wakefield

C&W’S TOP TRENDS REPORT SEES MASSIVE NEW SUPPLY IN CHINA’S KEY OFFICE MARKETS IN 2015

January 8, 2015, Beijing – Cushman & Wakefield, the world’s largest privately held commercial real estate services firm, recently has published its latest report, “Top Trends to Watch in 2015,” a wide-ranging overview of the key issues that will face occupiers and investors in the Asia Pacific region this year. According to the report, massive projected new supply is the defining trend in China’s key office markets, while decentralization, modern workplace strategies, the rapid growth of the high-tech sector and other significant factors will also shape the leasing and investment environments.

Across the Shanghai, Beijing, Chengdu, Guangzhou and Shenzhen markets, anticipated supply of high-quality office premises in CBD areas in 2015 stands at a record high of about 30 million square feet, followed by a further 45 million in 2016. As such, developers are keen to deliver as quickly as possible before the bulk of supply hits, which should create potential for huge relocation deals.

Source: Cushman & Wakefield Research


“Tenants will likely hold off on office relocations now and wait until new supply comes online in 2016, to examine their long-term occupancy requirements. There will be a flight-to-quality over the next several years as tenants upgrade from aging buildings that do not have the infrastructure to support their needs,” says Michael Stacy, Managing Director, Tenant Advisory Group, China.

Region-wide, with buoyant economic growth over the past decade, the cost of office space in most core locations has doubled compared to five years ago. This includes first-tier cities in China, where high-quality office premises continue to see strong demand from domestic firms, driven by the ongoing expansion of the tertiary sector’s share of the economy, as well as multinationals. Internet finance companies have also emerged as major occupiers of office space. Beijing and Shanghai will account for the bulk of absorption in the core Asia Pacific markets.

New supply in Asia Pacific, totaling an estimated 93 million square feet, will hit its first peak this year but overall vacancy rates, driven by healthy demand for office space, are estimated to edge up by just 0.6 percentage points. Consequently, the availability of quality space and expanding corporate activity will propel absorption to increase by over 20%, from an estimated 62 million square feet in 2014, to reach a seven-year high this year. The highest absorption gains are expected in Beijing and Shanghai, as well as Tokyo’s five Central Wards, among core markets; and Chengdu as well as Bangalore and Manila for emerging markets.

Year

2009

2010

2011

2012

2013

2014

2015

Absorption (msf) – 

Asia Pacific

24.2

68.8

68.7

60.2

51.8

61.9

75.9

Source: Cushman & Wakefield Research

For core cities in China, the teeming supply pipeline will bring relief to occupiers in Beijing and Shanghai, after a prolonged period of single-digit vacancies, which even reached as low 2.7% in 2011 and 3.8% in 2012, respectively. Tenants often had to choose from a very short list of vacancies that might not have been the best fit for their operations, and can look forward to the completion of nearly 14 million square feet in Beijing and 15 million square feet in Shanghai through 2016. Similarly, Taipei will witness over 900,000 square feet of office completions in 2015.

In Hong Kong, caution is still in the air. With high occupancy costs and limited availability in Greater Central, tenants are generally opting to better utilize their office space to keep costs down. On the upside, the Shanghai-Hong Kong Stock Connect scheme has the potential to lead to a huge increase in capital flows both into and out of China, with foreign investors being able to access a market valued at about US$2 trillion. This development bodes well for office demand in Hong Kong, but the impact is likely to be most meaningful over the long term. In our view, the mainland banks are likely to be stronger growth catalysts for Hong Kong in the near term given their current small footprint compared to international banks.

“It remains to be seen when office demand will recover due to occupiers’ focus on containing costs and the slower economy. However, we expect the office vacancy rate to remain relatively stable at around 6% through 2016. There will be limited new supply of office space for lease and rents will not fluctuate significantly. More supply and better demand in 2017–18 will likely stimulate tenant activities,” says John Siu, Managing Director, Hong Kong

Looking ahead, Cushman & Wakefield expect non-CBD locations to successfully compete by offering desirable locations with significantly lower rents. Absorption is beginning to reflect a growing interest in new projects in emerging suburban markets, where companies can secure high-quality office space relatively cheaply. In some cases, such as Beijing’s CBD, rents in prime buildings could be close to double the level of up-and-coming submarkets such as Wangjing. Those “urbanizing” suburbs that offer easy access to workplaces and a sufficient amount of mixed-use urban amenities offer some of the greatest real estate opportunities, a case in point being Hong Kong’s Kowloon.

Investment activity will continue to heat up in Asia Pacific. Outbound capital flows from China are expected to see further growth, while recent FTAs also augur well for investment activity; under the recently signed China-Australia Free Trade Agreement, private Chinese investors will be able to buy commercial property up to a value of AUD1.0 billion without requiring approval from Australia’s Foreign Investment Review Board. Cushman & Wakefield believe this change is likely to result in increased transactional activity in the market, especially considering the significant interest among Chinese investors in buying Australian property.

GDP growth in Asia Pacific is anticipated to continue to hover around 5.0%-5.3% through 2016 as momentum fades in the region’s largest economies. China’s growth is set to decelerate to somewhere between 6.0% and 7.0% in the next couple of years as the government prioritizes economic rebalancing over growth.

“In summary, the region’s office sector is expected to remain on solid footing even as slower economic growth will become the norm over the near term. In addition, the region will remain a growth destination for companies that seek to capitalize on the relatively favorable economic and demographic prospects of emerging markets as well as positive developments occurring in mature countries. Strong capital availability, combined with healthy leasing conditions across the region, will provide a diverse array of opportunities for all types of investors. Of course, there are concerns – geopolitics, weak global growth, policy missteps – that cloud the outlook; but risks are here to stay,” said Sigrid Zialcita, Managing Director of Research for Asia Pacific, Cushman & Wakefield.

2015 Supply

2015 Absorption

Hong Kong

0

100,000

Adelaide

230,590

207,540

Auckland

200,209

223,184

Brisbane

487,953

227,000

Taipei

919,138

284,640

Singapore

178,843

322,001

Perth

1,093,727

398,100

Melbourne

834,500

521,403

Sydney

1,893,760

645,600

Seoul

0

1,804,632

Shanghai

6,756,522

4,587,371

Tokyo

6,628,255

6,394,305

Beijing

7,977,126

6,821,915

 

2015 Supply

2015 Absorption

Hanoi

0

36,597

Kolkata

1,404,000

475,000

Bangkok

478,994

782,083

Ho Chi Minh City

1,119,040

826,153

Mumbai

750,000

867,000

Ahmedabad

1,000,000

980,000

Kuala Lumpur

1,653,990

1,774,800

Chennai

862,000

1,875,000

Shenzhen

4,405,115

3,065,994

Guangzhou

4,051,084

3,237,000

Pune

5,029,991

3,255,000

Hyderabad

2,785,095

3,758,000

Jakarta

6,530,458

3,778,129

Chengdu

7,642,638

4,305,560

NCR

8,081,207

5,850,000

Manila

6,772,710

7,719,931

Bengaluru

14,784,886

11,075,000

Source: Cushman & Wakefield Research

About Cushman & Wakefield 

Cushman & Wakefield is the world’s largest privately‐held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, risk management, consulting and appraisal. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.