Shenzhen InvestmentAsian Cities Report – 1H 2020

REPORT

Savills Research

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Shenzhen Investment

Shenzhen’s en bloc sales investment market sees record year in 2019

MARKET OVERVIEWShenzhen has enjoyed many political and economic advantages compared to other mainland cities due to its special city positioning and its proximity to Hong Kong, leading its GDP growth rate to continue to outstrip that of China over the past decades.

The city’s positive developments have signifi cantly strengthened investor sentiment and confi dence, resulting in a sound increase in the investment inquiries volume, site visits and eventual transactions in 2019. During the year, a total of 16 en bloc sales transactions, covering the offi ce, retail, industrial park and apartment sectors, were concluded, yielding a record-high combined transaction price of RMB41.1 billion in Shenzhen’s property investment market. Not only did this demonstrate that 2019 was an active year for Shenzhen’s investment market, but also that investor profi le of the overall market became more diversifi ed, relative to the previous years.

OFFICE SECTOR In response to the surge of new supply and increasing vacancy rate, rent plummeted 9.2% year-on-year (YoY) on a rental index basis during 2019, infl uencing a temporary but notable yield compression. However, investors, especially domestic ones, continued to expand in the market for strategic real estate acquisitions and capital deployment for longer-term investments and prospects in Shenzhen and the Guangdong-Hong Kong-Macau Greater Bay Area (GBA). As a result, in 2019, ten en bloc sales transactions out of 16 were sourced from the offi ce sector, accounting for 67.3% of the total price. Also, Shenzhen’s developing headquarter economy has attracted a growing number of enterprises to purchase offi ce properties for owner-occupancy. For example, six out of ten buyers in the offi ce sector were end-users, acquiring assets in Shenzhen for a combined consideration of RMB6.9 billion, which accounted for one-fourth of the total sectoral price.

Among all the districts, Nanshan district appeared to outperform its peers for its combined advantages of advanced infrastructure, sophisticated business environment, ample policy supports and high concentration of top enterprises as a result of the city’s “Go West” urban planning and development campaign. Naturally, this has made Nanshan one of the most preferred investment destinations among all the districts in the locality. This is reinforced by the fact that 70% of offi ce transactions were in Nanshan during 2019, including two sizable deals concluded by the institutional investors. For example, China Life Insurance Group purchased OCT Tower from China OCT Group for RMB12 billion and CITIC Prudential Life Insurance Group acquired China Resources Qianhai Tower #2 for approximately RMB7.1 billion from China Resources Land.

RETAIL SECTORSupported by the continued growth in migrants, purchasing power and consumption in Shenzhen, the local retail property market expanded rapidly, with a total number of 17 shopping centres debuting from 2017 to 2019. Despite total stock expanding by 31.4% to 4.8 million sq m in three years by the end of 2019, the citywide average vacancy rate remained relatively stable, averaging at 4.3% with small fl uctuations.

As a result, the sectoral investment market grew in appeal to a broad range of institutional investors, especially overseas ones, with core and core-plus investment opportunities receiving much of the attention. Notably, Link REIT, an overseas institutional investor who has been active in the mainland market, acquired Central Walk, with a total retail GFA of 83,900 sq m, for a total consideration of approximately RMB6.6 billion during the year. This was the largest en bloc sales transaction in terms of transacted retail area and price in Shenzhen’s retail property investment market in history.

OUTLOOKGiven the impact of the COVID-19 pandemic on the Chinese and global economies, China’s GDP forecast for 2020 was recently lowered to an average of 3.3% YoY by 13 Chinese and international fi nancial institutions in mid-March 2020. Strong economic fundamentals and internal demand are expected to drive a rebound in China’s economy in 2021, with its GDP forecast to increase 8% to 9%, according to some of the aforementioned institutions. Shenzhen, as one of the

GRAPH 1: Sales Contribution By Sector, 2019

Office, 67.3%

Retail, 24.2%

Apartment, 6.7%

Industrial Park, 1.8%

Source Savills Research

GRAPH 2: Rental Index Of Offi ce Sector By District, Q1/2010 to Q1/2020

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Futian Nanshan Luohu Bao'an Citywide

Source Savills Research

GRAPH 3: New Supply, Net Take-up And Vacancy Rate Of Retail Sector, Q1/2010 to Q1/2020

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New Supply (LHS) Net Take-up (LHS) Vacancy Rate (RHS)

Source Savills Research

Shenzhen Investment

Chinese economic centres, has demonstrated its strong economic resilience and demographic support in the past decades and shall remain so in the mid-to long-term development of economic and political commitments.

Despite the disruption of the COVID-19 pandemic, the Shenzhen property investment market is expected to be mixed in 2020. The property investment market of all sectors were temporarily stalled, with almost a vacuum of new enquiry and site visit activities during the period from mid-January to mid-March in 2020. Although investment interest in all commercial sectors remained unchanged, most investors postponed their actions but remained open to review opportunities and trophy assets on paper. A sign of recovery of investment market activities is expected to appear as the government promotes work resumption, and the epidemic becomes further contained in the rest of 2020 in the locality. In the offi ce sector, the outlook in 2020 remains challenging as oversupply continues to be a concern, and the forecasted supply peak in 2020 is expected to deteriorate market conditions, strengthening the negotiation power of investors. In the retail sector, investment interest should continue to drift up, though core and core-plus funds with lower fi nancing costs and stronger fi nancial and operational capabilities appear to have larger capacity of investing in en bloc retail assets in Shenzhen.

More domestic and overseas investors are setting foot in Shenzhen, trying to capitalise

on the city’s vibrant economy as well as unique policy support from central and local governments, by acquiring assets as part of

their mid-to long-term investment in the GBA.

TABLE 1: Major En bloc Sales Transactions In Shenzhen, 2019

PROJECT TYPE BUYER LOCATION

TRANSACTED

PRICE

(RMB BILLION)

PURCHASED

AREA

(SQ M)

OCT Tower Offi ce China Life Insurance Group Nanshan 12.0 150,360

China Resources QianhaiCentre (Tower #2) Offi ce CITIC Prudential Life

Insurance Group Nanshan 7.1 96,378

Central Walk Retail Link REIT Futian 6.6 83,900

Retail Podium at Central Times Retail Beijing Rhino Capital Luohu 2.4 47,000

Broaden Gate SoftwareBuilding (95% stake) Offi ce Infore Group Nanshan 2.2 50,516

Central Times (203) Offi ce China Gas Holdings Ltd. Luohu 2.1 50,000

Haifu No.1 (Block B) Offi ce Juncheng Holding Group Bao’an 1.0 10,919

Pingshan Town Haowei New Material Factory Industrial Park Shenzhen Koradior Fashion Co. Ltd. Pingshan 0.4 90,371

Source Savills Research

MAP 1: Distribution Of En Bloc Sales Transactions In Shenzhen, 2019

Source Savills Research

Guangming

Longhua

Bao’an

Nanshan

Futian

Longgang

Pingshan

Dapeng New AreaYantian

Luohu

No. of Transaction(s): 1Asset Type: Industrial Park

No. of Transaction(s): 1Asset Type: Industrial Park

No. of Transaction(s): 4Asset Type: Offi ce, Retail, Apartment

No. of Transaction(s): 1Asset Type: Retail

No. of Transaction(s): 8Asset Type: Offi ce, Retail

No. of Transaction(s): 1Asset Type: Offi ce

Industrial ParkApartmentRetailOffi ce

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