Beijing and Shanghai to see vacancy rates rising to 40pc and rents dropping 50pc
Fulton Mak 29 April 2009
An exodus of tenants from offices in Shanghai and Beijing, combined with supply in the pipeline, could drive vacancy rates as high as 40 per cent in some locations and drag rents down as much as 50 per cent from their peak levels by 2011, analysts are warning.
“The outlook for office rents in Shanghai and Beijing is crystal clear. A massive excess supply situation is building up, which will result in rents crashing by 30 to 50 per cent,” said Aaron Fischer, the head of Asian property and gaming research at brokerage and investment bank CLSA.
The outlook for office markets in Hong Kong and Singapore is equally troubling, with CLSA saying office rents in these markets could drop 60 per cent from peak levels because of deteriorating job markets and the global economic slowdown.
The grim prognosis for the office sector on the mainland is supported by Lee Hing-yin, a director of research and advisory at Colliers International’s East China division.
“Shanghai’s grade A office market will continue to face mounting pressure, as there is no sign of improvement in the external environment,” said Mr. Lee, who expects the average rent to fall 20 per cent this year and grade A rents to drop much more than that.
“Landlords of premium grade A offices could cut rents even more aggressively because they are losing tenants including foreign financial institutions and consultancies, which are scaling down [operations],” Mr. Lee said.
The leasing market turned relatively active after the Lunar New Year, but this could not be deemed a genuine sign of improvement, he said.
“Most of the transactions were lease renewals, as most leases commonly expire in the first quarter,” he said. “A lot of new leases were from relocation demand, as tenants downgraded to cut costs or consolidated their operations.”
According to property consultant DTZ, the vacancy rate in the Shanghai grade A office market was 16.9 per cent at the end of last month, up 1.7 percentage points from the fourth quarter of last year and 12.3 percentage points year on year. It was the highest since 2001.
By district, DTZ said Xuhui - a relatively mature business district - had the lowest vacancy rate at 5.75 per cent, whereas Zhabei - about 10 minutes north of Shanghai’s central business district via the North-South Elevated Highway - had the highest vacancy rate at 38.2 per cent.
The surge in vacancies in Shanghai has been partially attributed to the completion of the 33,000 square metre SIPG Tower in Hongkou district that boosted the city’s stock of grade A office space to 5.3 million square metres of gross floor area.
Together with the exodus of existing tenants and softening demand from new tenants, this led to 61,717 square metres of negative absorption in the first quarter, DTZ said.
Negative absorption occurs when new supply and space surrendered by tenants exceed the space taken up over the same period. It was the second consecutive quarter of negative absorption after the 206,172 square metres recorded in the fourth quarter of last year.
The average daily rent for grade A offices stands at 7.69 yuan (HK$8.73) per square metre, down 5.2 per cent from a quarter earlier and 9 per cent year on year.
In view of the massive new supply, estimated at more than 300,000 square metres this year and a further 300,000 square metres next year in Pudong, Mr. Fischer forecasts the vacancy rate in the fast-growing district will reach 35 to 40 per cent in 2011 from 22 per cent.
Supply in the pipeline is far more than take-up rates of 200,000 square metres this year and 210,000 square metres next year for Shanghai, as calculated by Jones Lang LaSalle.
In the relatively mature Puxi district, about 300,000 square metres of new supply would come on stream in the next two years, and the vacancy rate would climb to 15 per cent from about 7 per cent, Mr. Fischer said. Pudong office rents could drop 50 per cent from their peak in the third quarter of last year, and Puxi rents could drop 30 per cent.
The silver lining in the gloomy office market could come from policy to support a recent affirmation by the central government that it would pursue a strategy of ensuring that Shanghai became an international financial and shipping hub by 2020.
In Beijing, the office market recorded a negative absorption of 1,084 square metres in the first quarter, which raised the vacancy rate of grade A offices to 18.97 per cent by the end of last month. That was a 5.72 percentage point increase from the fourth quarter.
The average monthly office rent in Beijing was down 9.26 per cent quarter on quarter at 207 yuan per square metre, DTZ said.
“Oversupply is a key problem that the Beijing office property sector faces,” DTZ said in a recent report.
About 1.3 million square metres of new supply is expected to enter Beijing’s office property market this year and, added to new projects launched last year but yet to achieve occupancy rates of over 50 per cent, this could seriously weaken market conditions in the second half, the report warned.
In the first quarter alone, four grade A office buildings offering 327,000 square metres in gross floor area entered the market.
Carlby Xie, an associate director and the head of research and advisory of Colliers’ North China division, said the district governments in Beijing had released various measures - including rental subsidisation or tax rebates for senior executives of financial institutions located in the district - to attract companies to register in their districts.
That was a positive to the market, but amid the imbalance between supply and demand, vacancy rates remained on a rising trend, he said.
Citing Jones Lang LaSalle’s estimate of 2.3 million square metres of new office supply for Beijing this year and 750,000 square metres next year, Mr. Fischer forecasts that the net take-up area would only amount to 19 per cent and 72 per cent of the new supply in the respective years.
He expects Beijing’s overall vacancy rate to rise from 22.5 per cent now to 35 per cent by the end of this year, and the average rent to fall 15 per cent this year and next before stabilising as new supply contracts.
“The crux of the problem in the Beijing market is that actual demand for office space has begun to fall drastically short of original demand expectations,” the DTZ report said.
It said whether the leasing market in the city would rebound next year depended heavily on global and domestic demand expectations for manufacturing output over the next two years.
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Mainland grade A offices feel pinch
Beijing and Shanghai to see vacancy rates rising to 40pc and rents dropping 50pc
Fulton Mak
29 April 2009
An exodus of tenants from offices in Shanghai and Beijing, combined with supply in the pipeline, could drive vacancy rates as high as 40 per cent in some locations and drag rents down as much as 50 per cent from their peak levels by 2011, analysts are warning.
“The outlook for office rents in Shanghai and Beijing is crystal clear. A massive excess supply situation is building up, which will result in rents crashing by 30 to 50 per cent,” said Aaron Fischer, the head of Asian property and gaming research at brokerage and investment bank CLSA.
The outlook for office markets in Hong Kong and Singapore is equally troubling, with CLSA saying office rents in these markets could drop 60 per cent from peak levels because of deteriorating job markets and the global economic slowdown.
The grim prognosis for the office sector on the mainland is supported by Lee Hing-yin, a director of research and advisory at Colliers International’s East China division.
“Shanghai’s grade A office market will continue to face mounting pressure, as there is no sign of improvement in the external environment,” said Mr. Lee, who expects the average rent to fall 20 per cent this year and grade A rents to drop much more than that.
“Landlords of premium grade A offices could cut rents even more aggressively because they are losing tenants including foreign financial institutions and consultancies, which are scaling down [operations],” Mr. Lee said.
The leasing market turned relatively active after the Lunar New Year, but this could not be deemed a genuine sign of improvement, he said.
“Most of the transactions were lease renewals, as most leases commonly expire in the first quarter,” he said. “A lot of new leases were from relocation demand, as tenants downgraded to cut costs or consolidated their operations.”
According to property consultant DTZ, the vacancy rate in the Shanghai grade A office market was 16.9 per cent at the end of last month, up 1.7 percentage points from the fourth quarter of last year and 12.3 percentage points year on year. It was the highest since 2001.
By district, DTZ said Xuhui - a relatively mature business district - had the lowest vacancy rate at 5.75 per cent, whereas Zhabei - about 10 minutes north of Shanghai’s central business district via the North-South Elevated Highway - had the highest vacancy rate at 38.2 per cent.
The surge in vacancies in Shanghai has been partially attributed to the completion of the 33,000 square metre SIPG Tower in Hongkou district that boosted the city’s stock of grade A office space to 5.3 million square metres of gross floor area.
Together with the exodus of existing tenants and softening demand from new tenants, this led to 61,717 square metres of negative absorption in the first quarter, DTZ said.
Negative absorption occurs when new supply and space surrendered by tenants exceed the space taken up over the same period. It was the second consecutive quarter of negative absorption after the 206,172 square metres recorded in the fourth quarter of last year.
The average daily rent for grade A offices stands at 7.69 yuan (HK$8.73) per square metre, down 5.2 per cent from a quarter earlier and 9 per cent year on year.
In view of the massive new supply, estimated at more than 300,000 square metres this year and a further 300,000 square metres next year in Pudong, Mr. Fischer forecasts the vacancy rate in the fast-growing district will reach 35 to 40 per cent in 2011 from 22 per cent.
Supply in the pipeline is far more than take-up rates of 200,000 square metres this year and 210,000 square metres next year for Shanghai, as calculated by Jones Lang LaSalle.
In the relatively mature Puxi district, about 300,000 square metres of new supply would come on stream in the next two years, and the vacancy rate would climb to 15 per cent from about 7 per cent, Mr. Fischer said. Pudong office rents could drop 50 per cent from their peak in the third quarter of last year, and Puxi rents could drop 30 per cent.
The silver lining in the gloomy office market could come from policy to support a recent affirmation by the central government that it would pursue a strategy of ensuring that Shanghai became an international financial and shipping hub by 2020.
In Beijing, the office market recorded a negative absorption of 1,084 square metres in the first quarter, which raised the vacancy rate of grade A offices to 18.97 per cent by the end of last month. That was a 5.72 percentage point increase from the fourth quarter.
The average monthly office rent in Beijing was down 9.26 per cent quarter on quarter at 207 yuan per square metre, DTZ said.
“Oversupply is a key problem that the Beijing office property sector faces,” DTZ said in a recent report.
About 1.3 million square metres of new supply is expected to enter Beijing’s office property market this year and, added to new projects launched last year but yet to achieve occupancy rates of over 50 per cent, this could seriously weaken market conditions in the second half, the report warned.
In the first quarter alone, four grade A office buildings offering 327,000 square metres in gross floor area entered the market.
Carlby Xie, an associate director and the head of research and advisory of Colliers’ North China division, said the district governments in Beijing had released various measures - including rental subsidisation or tax rebates for senior executives of financial institutions located in the district - to attract companies to register in their districts.
That was a positive to the market, but amid the imbalance between supply and demand, vacancy rates remained on a rising trend, he said.
Citing Jones Lang LaSalle’s estimate of 2.3 million square metres of new office supply for Beijing this year and 750,000 square metres next year, Mr. Fischer forecasts that the net take-up area would only amount to 19 per cent and 72 per cent of the new supply in the respective years.
He expects Beijing’s overall vacancy rate to rise from 22.5 per cent now to 35 per cent by the end of this year, and the average rent to fall 15 per cent this year and next before stabilising as new supply contracts.
“The crux of the problem in the Beijing market is that actual demand for office space has begun to fall drastically short of original demand expectations,” the DTZ report said.
It said whether the leasing market in the city would rebound next year depended heavily on global and domestic demand expectations for manufacturing output over the next two years.
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