China’s residential market policies shift purchasing power to office market

KUALA LUMPUR: Due to policies in 2013 targeting residential properties, investors in China’s first-tier cities (Beijing, Shanghai and Guangzhou) have shifted their purchasing power to the office market instead.

Grade A office rents in the three cities remained stable due to the implementation of these residential policies, said global real estate agency Knight Frank in its Greater China Property Market Report 4Q13.

In Beijing, 265,000 sq m of space contributed by three Grade A offices coming into the market last year pushed vacancies up 1.1% quarter on quarter (q-o-q) to 5%, subsequently lowering rents 0.6% to 381.5 yuan (RM204) psm per month. Overall rents fell 3.6% with prices rising 18.4%.

About 288,000 sq m of new Grade A offices have temporarily increased vacancies to 5%. However, vacancy rates are expected to hold on the back of limited incoming supply of 300,000 sq m this year. Beijing offices recorded average prices of US$9,309 (RM30,590) psm with rentals of US$62.60 psm per month and yield of 6.1%.

In Shanghai, the Grade A office market saw 234,000 sq m of new space come in during 4Q. This in turn pushed vacancy rates down 0.1% to 4.3% amid strong demand while office rents increased 0.7% q-o-q to 278.1 yuan psm per month.

The completion of 510,000 sq m of new office space in Shanghai over 2013 dropped vacancy rates to 4.3%. Average prices stand at US$8,531 with rentals of US$45.70 psm per month and yields at 5.8%. However, the supply of new office space was much lower than initially expected due to a delay in the completion of several Grade A office buildings.

In Guangzhou, Grade A office sales surged 30% driven by the new supply of 130,000 sq m in the market, pushing vacancy rates up 1% and lowering rents 0.6% to 176.1 yuan psm per month. Guangzhou average prices were at US$5,807 psm with rentals at US$28.90 psm per month, vacancy rates at 21% and with yields of 6%. New supply in Guangzhou was in Pearl River New City.

Hong Kong’s prime office sales could be expected to slowly rise in 2014 as capital accumulates and the market absorbs the effects of the government’s cooling measures. Companies are pursuing cost-saving initiatives where tenants are negotiating rent renewals early before leases expire. The average price of office space stands at US$25,765 psm with rentals of US$66.20 psm per month. Vacancies and yields stand at 3.6% and 2.9% respectively.

Over the next three years, office supply is expected to reach one million sq m, including 600,000 sq m that will be launched this year. The leasing market will remain soft while vacancies will rise this year, bringing rents down. Meanwhile, new Grade A office sales are expected to keep prices high while reducing yields even more.

Over in the residential market, Beijing released its “self-use residential property policy” in October, which is intended for registered and unregistered families who own one home to buy a single self-use residential property priced 30% below market value.

Shanghai’s “seven articles” in November declared an increase in residential land supply and a raise in the threshold for non-local homebuyers, while all three cities increased the minimum down-payment ratio for second homes from 60% to 70%.

In Hong Kong, 12 sites for residential development will be opened up in 1Q14 for 5,500 flats. However, Knight Frank believes that it will pose some difficulties for the government to try to achieve its annual target if no time frame is set for its mass transit railway projects which could offer up to 6,000 units of flats. Hong Kong’s average prices were at US$30,486 psm with rentals of US$56.5 psm per month. Its vacancy rates and yields stood at 11.7 % and 2.3% respectively.

This article first appeared in The Edge Financial Daily, on March 14, 2014.

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