SHANGHAI, Feb. 23, 2016 /PRNewswire/ -- DTZ/Cushman & Wakefield, a global leader in commercial real estate services, published its latest report today, "China Office H2 2015". According to the report, in the run-up to year end 2015, continued delivery of sizeable quantum of new office supply in many of the 16 office markets tracked in China, especially the Tier 1 cities, generally met with substantial pre-leasing commitment and absorption, mostly from financial services and IT sector occupiers. While continued growth in supply was an important factor contributing to the spike in leasing activity in Q4, many other factors also came into play, including the growing trends for cost sensitive companies to relocate to secondary hubs and business parks. At the same time, the inevitable rise in availability levels prompted by these completions has, in some instances, brought downward pressure to bear on rents. However, in half of the cities tracked, due to special circumstances, grade A rents actually continued to rise, despite the upward pressure on availability levels.
Andrew Ness, Head of Research, Greater China, DTZ/Cushman & Wakefield, said: "Across the 16 cities tracked, nine cities witnessed triple-digit y-o-y growth in leasing activity in 2015, with Changsha, Chongqing, Nanjing, Qingdao, Shanghai, Tianjin, and Xi'an all recording net absorption within the year at historically unprecedented levels. To no small extent, this surge in office leasing activity, was driven by the ongoing wave of office completions, and further boosted by the multiplier effect it had on occupiers' choice of destinations for flight to cost savings or quality moves, which in many markets were possible to combine in one stroke. However, not every market witnessed a surge in office leasing activity and completions in the run-up to year end 2015, and a number of the relatively less heavily transacted markets still witnessed a markup in rents."
Drilling down to office leasing market performance in 2015, we note that the overall market direction has been mixed, with 9 of the 16 markets recording generally moderate rise in office market rentals y-o-y and 7 markets recording varying degrees of decline. However, difference in the supply/demand dynamic varies widely between China's individual office leasing markets, such that both the more buoyant as well as the consolidating office leasing markets can each be divided into a number of sub-types, based on specific combination of factors tending to either strengthen or weaken landlords' pricing power.
Rents as in Q4 2015 (RMB/sq m/month) and y-o-y growth
Broadly speaking, grade A office markets which continued to witness a pattern of rising rents in 2015, can be sub-divided into two distinct types.
The first type are markets where the presence of an extraordinary demand driver has been sufficient to overcome a growing supply/demand imbalance due to the fact that the presence of this persisting source of demand has been sufficient to strengthen landlords' pricing positions, and especially the owners of premium grade office properties coming on stream in sought after locations. In the run-up to year end 2015, such landlords have had no difficulty in commanding premium rents for such properties. Shenzhen and Shanghai, where the attraction exerted by the presence of the FTZ and Qianhai caused office rents to rise by 0.3% and 1.9% q-o-q and by 7.9 % and 4.4% y-o-y, despite a continued wave of office completions and the prospects of even substantial supply in the offing.
The second type of markets which recorded rent hikes were those where certain leasing strategies deployed by local landlords, taken in conjunction with a slight tightening in supply conditions worked to drive up rents, with Dalian and Wuhan being the two cases in point. In Dalian, where a rising tide of bankruptcies by microfinance and P2P financial companies have moved the owners of the city's prime office properties to protect themselves against leasing risk by raising the standards for accepting incoming tenants. This move towards greater exclusivity caused Dalian grade A rents to tick up 2.7% q-o-q. By the same token, in Wuhan, where grade A completions in 2015 were similarly constrained, the delivery of one premium core CBD office building which was offered to the market with very conservative rental expectations delivered very good marketing results. The success of this leasing strategy was a major factor prompting Wuhan rents to tick up 0.6% q-o-q and record a 4.7% y-o-y rise.
Just as we have identified two specific combinations of circumstance which have sparked a rising trend in rents in individual office market, so may we also analyze the markets in which office rents declined in Q4 2015 according to four distinct types.
The first type comprises cities where recent softening in rents does not bespeak any weakness in the market, but rather indicates the impact of relocation moves by big corporate occupiers to achieve cost savings, which is a form of natural evolution, and not the result of structural imbalance. Beijing would be a case in point, in that its grade A office rental not only remained stable across its five core sub-markets in 2015, and net absorption by properties in the city's core sub-markets reached the highest level since 2012. However, because rents in Beijing's core sub-markets have persistently remained at high levels since 2011, many tenants have been prompted to move all or part of their office operations to secondary office locations. Hence, within 2015, these secondary hubs have emerged as a more formidable competitor for core downtown office precincts, and have actively begun to erode the tenant base of core CBD office properties.
A second type is represented by cities like Tianjin and Changsha, which recorded rental declines of 2.1% and 7.0%, on annualized basis and by 0.2% on a q-on-q basis, but where, over the very short term the completion of high quality properties in 2016 is actually expected to boost the performance of certain office sub-markets. But here the comparison stops, mainly because Changsha is not in the midst of developing major new satellite office areas, and so the boost derived from the introduction of new premium properties is likely to be a one-off effect. In this respect, Tianjin is quite different, chiefly because its Yujiapu Free Trade Zone is expected to evolve rapidly over the coming 2-3 years and the presence of this kind of satellite business office hub will potentially attract more occupiers to relocate from the central city area, inevitably leading to more downward pressure on rents.
A third type is represented by cities like Shenyang, Hangzhou, Xi'an and Chengdu, all of which recorded downturn in rent on an annualized basis in 2015, but the future prospects for each of these cities is for continued softening in the office leasing market for at least the next 2-3 years as more pipeline projects come on stream. Similar to Tianjin, for some of these markets prospects of the situation being alleviated are further dimmed by the likelihood of increased competition from non-core areas, with Hangzhou being a case in point. For other cities, such as Chengdu, while the scale of future supply would appear to be overwhelming, the fact that the city has been cited as one of the top 10 global cities for entrepreneurship and innovation suggests that demand for co-working space and other types of alternate office workplace facilities may grow by leaps and bounds, eliminating any worries that future supply will not be fully utilized.
The fourth and final type is represented by Xiamen, where postponed 2015 delivery of a major office complex containing multiple towers may put the market under severe downward pressure over the immediate short term, but where over the longer term, one would have to take a positive view of the prospects of new business zones seeking to benefit from the maturation of the Cross Straits Financial Services Centre. Emphasis of launching this new zone is on positioning Xiamen as the major center for commercial interaction across the Taiwan Straits, the attractiveness of this theme has the potential to act drive the absorption of any excess office stack going forward.
"Several Greater China office markets are poised to see a surge in their pipelines and the resulting new supply will continue to overshadow markets in second tier Chinese cities over the next few years. Estimated new supply over the next five years in some tier two cities is the equivalent of their existing stock, and in some extreme cases, several times as much. Unavoidably, vacancy rates in these cities will rise which may subsequently force rents to drop. At the same time, despite the large volume of new supply in the four tier one cities, high demand in grade A offices and fast destocking are expected to provide stability to their office markets," said Jonathan Wei, Managing Director, Occupier Services, China, DTZ/Cushman & Wakefield.
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