April 11th, 2013, Beijing — CBRE Group, Inc. (CBRE) today released its 2013 Q1 China Real Estate Market Review and Outlook. Despite a gradual recovery in domestic economy, the overall market demand for offices remained weak in Q1 of 2013 with the lowest level of take-up since Q1 of 2009, while rentals were basically flat. Retail market remained resilient. While retail new supply stayed at high level, overall vacancy rate fell slightly driven by brisk leasing activities with rents rose slightly. Affected by the uncertainties from the newly-announced policies, transaction volume of ordinary residential markets picked up markedly while the high-end residential market remained relatively stable. The steady upward trend in the industrial market continued in Q1 2013.

It is expected that a number of second-tier cities will face peak office completions in the coming quarters, which in turn will continue to push up the market vacancy rate and cap the growth potential of offices. Some office projects may even postpone their completion to avoid the completion peak. Looking ahead, retail supply in the pipeline remains abundant. The increasing supply will on one hand enhance the average property quality and expand the retail markets’ geographic distribution, while on the other hand bring great pressure to the project pre-lease of cities with high supply. Developers may need to deal with the situation through strategies such as differential positioning, differentiated marketing and delayed opening for businesses. With constantly tightening regulation policies for the residential market, housing prices growth is expected to decelerate and transaction volume will decrease due to the wait-and-see attitude in the market. Due to the impact of limited supply of quality industrial property, relatively low land price and industry development trends, industrial property is expected to be one of the hot spots in the future property market.

Office Market

Net take-up nation-wide only reached 523,865 sqm in Q1 2013, down 21.8% q-o-q and down 37.8% y-o-y, the lowest level since Q1 of 2009. At the same time, new supply during also dropped markedly as a number of projects postponed their deliveries. As a result, nationwide office vacancy fell by 0.2 percentage points to 12.6%. The vacancy rate of first-tier cities declined for two consecutive quarters, but the vacancy rate in second-tier cities continued to rise since the fourth quarter of 2011. In this quarter, the trend of nationwide rents remained stable.

In terms of regional performance, demand from cities in Western and Central China (Chengdu, Chongqing, Xi'an, Wuhan) declined most in this quarter, with office net take-up in these regions down 60% y-o-y. The demand for prime offices in East China recovered to some extent, with regional net take-up increasing 11% q-o-q and the vacancy rate down 0.6% in Q1. As for rents among first-tier cities, rents in Shanghai and Shenzhen declined, while rents in Beijing and Guangzhou increased slightly. Of the second-tier cities, rentals in Chengdu and Dalian declined at the highest rate; Wuhan and Chongqing recorded more than 1% growth; other cities remained stable.

A number of second-tier cities will experience peak office completion and delivery in the next few quarters, which is expected to continue to push up vacancy rates. Second-tier cities in West China are expected to face greater pressure in office pre-leasing and leasing. As such, rent performance will be under pressure and some office projects may push back their deliveries.

Retail Market

In Q1 2013, national retail leasing activity remained robust. Except for the East China area, many cities in other areas all have new properties entering the market. Most of the newly completed retail properties achieved satisfactory occupancy rate upon opening. The international top luxury brands continued to expand in China, but at a decelerating pace. International and domestic fast fashion brands and F&B entertainment brands remained active in expanding into second-tier cities. Driven by strong demand, the vacancy rate of national prime retail dropped 0.3% q-o-q to 9.3%. The average retail rent edged up 0.9%, with first-tier cities registering a growth rate of 1.7%.

In terms of regional performance, retail supply in second-tier cities in North and West China stayed at a high level; new retail space from these two areas took up nearly 80% of the total new national supply in Q1. The average rental rate increased more than 8% y-o-y, led by Hangzhou, Beijing and Wuhan. Although there were no new projects entering the market in this quarter, impacted by previous stock and future large supply, the retail market in Shenyang remained bleak with vacancy rates continuing to rise, and rental rates continued to drop. In response to the bleak market situation, multiple projects chose to close for fit-out or actively conduct tenant adjustment. Some department stores faced brand withdrawal and stopped business for internal modifications.

As the growth of retail spending slows down and competition intensifies, it is anticipated that luxury retailers might slow down their expansion in China in the future and turn their focus on existing stores for quality and image promotion, especially those in first-tier cities, while also emphasizing more personalized services to distinguish their market positioning. In terms of the geographical distribution of retail properties, many second-tier cities represented by Ningbo, Chengdu and Chongqing have shown an obvious trend of expanding from core central areas to urban sub-centers or decentralized areas. It is predicted that this trend will be even more obvious as more new properties enter the market. Due to the relatively stable supply demand dynamic, it is predicted that retail performance of the first-tier cities will continue to stabilize. As many second-tier cities will usher in retail supply peak in succession in the future, the retail vacancy rates there may rise and the rental growth will visibly slow down. In view of the increasing pressure to recruit tenants, it is expected that there will be more retail projects in second-tier cities choosing to defer entry.

Residential Market

On March 1st, the State Council issued its Notice on Continuously Fulfilling Real Estate Market Regulations, reiterating the importance of housing price stabilization, strengthening of the construction of common and indemnified residences along with the enhancement of market supervision. The notice signals that stricter regulatory policies are likely to be implemented in limiting purchases, differentiated loans and taxation. Except for Beijing and Shanghai defining “basic stabilization” as its goal with respect to 2013 housing price control, local governments of many other places have confirmed that the increased rate of housing prices should not exceed that of the disposable income of local residents. Although numerous details are pending finalization for new housing price control policies and the short-term transactions of the common residence market are strong, the impact on the high-end residential market is still unclear.

It is anticipated that this policy round will send out a signal of tight control of the housing market by levying a 20% capital gain tax and with further tightening of loan policy on second home purchases. Such policy will effectively curb the rising expectations of the housing market since Q2 of 2012, and will hold down the growth rate of housing prices in the foreseeable future. The volume of housing purchases and sales according to estimates will decline because of the rising transaction costs and wait-and-see attitude of home buyers. However, considering that the total of new lands purchased by real estate developers were almost stagnant in 2011 and the first half of 2012, in the short run new supply and the probability of significant decrease of housing prices will be low. If housing prices continue to grow in some cities, there may be additional tightening policies put in place by local governments.

Industrial Market

Q1 has witnessed a stable increase of industrial markets nationwide. Regarding the prime logistics market, rental rates have shown little change due to balanced supply and demand in Shanghai, Hangzhou and Dalian while other cities have all seen rental growth of different degrees. Among first-tier cities, Beijing, Guangzhou and Shenzhen have seen robust demand and rental rates will further rise due to limited leasable space. Among the second-tier cities, most will experience strong logistics market except Chengdu, whose logistics market may contract due to a concentration of supply. Regarding business parks, the “spillover” from office spaces to business parks, which significantly appeared in Shanghai and Beijing, will also happen in many second-tier cities where the office rental rates are growing fast.

In view of the limited supply of prime properties, and the relatively cheap price of industrial land, the recovering manufacturing and prospering e-commerce and logistics industries , it is estimated that the future need of the industrial market will remain strong, with the scale of industrial facilities, especially that of logistics and warehouse market, will further expand.

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2012 revenue). The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

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