China Commercial Property Investment Slows in Q2 as Caution Prevails over Growing Supply

HONG KONG, CHINA -�Media OutReach – 28 July 2019 - According to Cushman & Wakefield
Research’s latest Greater China Capital Markets Express report, Mainland
China’s commercial property investment slowed 19% y-o-y to RMB40.2 billion in
Q2 as investors become increasingly cautious given ongoing trade friction,
softer leasing demand and new supply, particularly in the office sector. The
office vacancy rate across Mainland China peaked at 19.7% in Q2, further
driving down rent 1.5% q-o-q on average. 
In contrast, investment picked up in Hong Kong and Taiwan in Q2,
recording a q-o-q increase of 510% and 65%, respectively.

Despite reduced
investment during the quarter, over the first half of the year investment
amounted to RMB125.8 billion, edging up 3.3% y-o-y. In particular, Singaporean
investors have been increasingly active and have invested a total of RMB43.5
billion in mainland China over the last 18 months, significantly above the
10-year average of roughly RMB5 billion per year. Investors from Hong Kong, the
U.S. and Canada also have been reasonably active over the past year.

 

Francis Li, Head of Capital Markets, Greater China at Cushman &
Wakefield, mentioned, “Many investors with dry powder ready to deploy
are actively looking for quality assets at the right price with the right
return. Recently, we noticed that there is a 10-20% price gap between buyer’s
and seller’s expectation which leads to prolonged deal negotiation and
finalization. Going forward, as there is an increasing amount of tradeable
assets flowing onto the market, we expect price to soften in the second half of
this year. Currently, cap rates are hitting historical low and with the
expected price drop in the near term will likely lead to improved returns over
time. Additionally, quality assets at prime location are increasingly sought
after by large foreign institutional investors with deep pocket. Once prime
assets or a portfolio of asset are available for sale, we shall expect
investment volume to come back again.”

 

James Shepherd, Head of Research, Asia Pacific at Cushman &
Wakefield, said: “For many market participants, it has been a
challenging first half of the year. The U.S.-China trade dispute continues to
weigh heavily on sentiment. Absorption of commercial premises all but stalled
the previous quarter, albeit levels came back sharply in Q2 as a certain amount
of pent up demand was released. Despite this recent flurry of leasing activity,
we forecast that the remainder of 2019 will see softer demand than in recent
years. Nevertheless, the mainland Chinese economy is proving more resilient
than some suggest, and stimulus measures are already showing signs of offering
some relief.”

 

Investment activity
picked up in core Tier-2 cities such as Tianjin and Chengdu. Both cities
recorded large retail investment deals in Q2 totaling RMB7.9 billion and 2.2
billion in Q2, respectively. In addition to ARA’s recent JV investment in
Chengdu’s Atrium Mall, Blackstone expects to complete its acquisition of
Taubman’s CityOn portfolio this year, with two of the three retail properties
located in Xi’an and Zhengzhou.

 

Catherine Chen, Head of Forecasting & Capital Markets Research,
Greater China at Cushman & Wakefield, said: “Benefiting from
population growth and rising disposable incomes, shopping centers in prime
locations of some Tier-2 cities are increasingly attractive to both domestic
and foreign investors. In addition, logistics properties remained highly
sought-after given the sector outlook, restrictions on land availability and
slightly higher cap rates in comparison to the office sector. Logistics gross
yields for high quality facilities typically range from 5% to 6.5% across
mainland China.”

 

Notable logistics
transactions in Q2 included ICBC’s purchase of three Yupei logistics parks in
Shenyang, Wuxi and Zhengzhou for a combined consideration of RMB755.3 million.
In addition, e-commerce giant JD.com recently established a JD Logistics
Properties Core Fund together with Singapore’s sovereign wealth fund with a
total committed capital of RMB4.8 billion. The fund expects to complete the
purchase of logistics facilities from JD Property Management (JDPM) for RMB10.9
billion before the end of this year.

 

Chen added, “An increasing number of municipal governments are
enforcing ‘minimum tax requirements’ (already effective in cities such as
Shanghai, Nanjing, Suzhou and Hangzhou) on newly acquired logistics sites,
suggesting these new logistics centers may take longer time to lease up as
landlords become selective as they seek tenants that can meet the minimum tax
requirements.”

 

Shepherd added, “We anticipate a strong infrastructure
investment drive through 2019 and 2020. Coupled with massive forecast
employment in China’s tertiary industry, especially in Tier-1 and core Tier-2
cities between 2019 and 2021, this will support the expansion of Mainland
China’s commercial real estate market.”

 

According to Oxford
Economics, between 2019 and 2021 mainland China’s Tier-1 cities are forecast to
add over 1.2 million jobs, the lion’s share of which is projected for the
tertiary sector.

 

Click here to view the full report.

About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global
real estate services firm that delivers exceptional value for real estate
occupiers and owners. Cushman & Wakefield is among the largest real estate
services firms with 51,000 employees in approximately 400 offices and 70
countries. Across Greater China, there are 22 offices servicing the local
market. The company won four of the top awards in the Euromoney Survey 2017
& 2018 in the categories of Overall, Agency Letting/Sales, Valuation and
Research in China. In 2018, the firm had revenue of $8.2 billion across core
services of property, facilities and project management, leasing, capital
markets, advisory and other services. To learn more, visit www.cushmanwakefield.com.hk or follow us on
LinkedIn (https://www.linkedin.com/company/cushman-&-wakefield-greater-china)