chengdu property market 2014 review & …...6 chengdu property market 2014 review and 2015...

CHENGDU PROPERTY MARKET 2014 REVIEW &2015 OUTLOOK

2 Chengdu Property Market 2014 Review and 2015 Outlook | Colliers International

Contents

Grade A Office

Retail

Land Sales Market

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3Colliers International | Chengdu Property Market 2014 Review and 2015 Outlook

Fu River, Chengdu


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The Chengdu Grade A office market slowed down in 2014 from the previous year, with new supply significantly outpacing the year’s level of annual net absorption. As a result, the overall vacancy rate increased six percentage points by the end of the year. Nearly 58.6% of new supply was in the Financial Town and Dayuan submarkets, where rentals are below market average, in turn pulling down the average rental in 2014. By the end of 3Q14, the tertiary industry expanded by 7.8% y-o-y, slower than the same period in 2013, thus limiting support to the Grade A office market.

Grade A Office

Figure 1: Chengdu Office Annual New Supply, Net Absorption and Vacancy Rate

Figure 2: Chengdu Grade A Office Average Rent and Change

Five projects were completed during 2014, adding a total of 369,700 sqm of new supply and increasing total stock to 1.5 million sqm. However, the new supply in 2014 coincided with softening demand, after a strong 2013, leading the net absorption decreased by 59.2% y-o-y to 172,298 sqm. Leasing demand was driven primarily by the modern services and manufacturing sectors in 2014. Headline leasing transactions in 2014 included MOKI’s new lease of 1,500 sqm at Chengdu International Finance Square (IFS); Rider Levett Bucknall’s new lease of 2,000 sqm at Square One; China Jianyin Investment’s new lease of 1,600 sqm at China Overseas International Centre (Tower A); Fuji Xerox’s one-floor commitment to 1,800 sqm at Raffles City; and the Israeli Consulate General’s (Chengdu) new lease of 1,200 sqm at the Atrium.

“Chengdu’s Grade A office market expanded rapidly in 2014, with tremendous new supply added during the year. However, the volume of this new supply coupled with a slowdown in economic growth created a challenging environment for landlords, as average rents declined and vacancy rates increased, keeping yield says at a low level in the short term accordingly”

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Retail (Shopping Centre)The Chengdu retail property market remained active in 2014, underpinned by growth in retail sales of consumer goods by 12.1% y-o-y to RMB377.1 billion by the end of November 2014. A considerable number of well-known domestic and international brands opened their first regional or flagship stores in Chengdu, and the city continued its development as a retail hub for southwest China.

Seven new shopping centres were launched in 2014, adding approximately 852,104 sqm of new supply to Chengdu’s retail property market. As a result, the total stock expanded to 3.7 million sqm by the end of the year. Two of these new shopping centres (323,000 sqm) were added to the prime retail catchment, bringing the total stock of this catchment to 888,228 sqm.

Demand in Chengdu’s retail property market was active in 2014, and was primarily driven by the fashion, F&B, luxury, culture and entertainment, children, cosmetics and personal care sectors. Headline leasing transactions in 2014 included Muji’s opening of a 3,100 sqm global flagship store, Hermes’ opening of a 1,700 sqm Asia Pacific flagship store and Fangsuo’s opening of a 4,000 sqm store, its second store in China, all at Sino-Ocean Taikoo Li Chengdu; Louis Vuitton’s opening of a 2,600 sqm southwest flagship store at Chengdu International Finance Square (IFS); and domestic restaurant chain Haidilao’s opening of a 1,100 sqm restaurant at Paradise Walk, its second store in Chengdu.

In the light of growing supply and softening demand, several landlords offered discounts or other rental incentives to attract or retain tenants, many of whom faced tightened leasing budgets, due to a deceleration of their expansions as a result of the national economic slowdown. Consequently, the average rent in the Chengdu Grade A office declined by 2.0% by the end of 2014 to RMB111.8 psm. However, the East Avenue and Dayuan submarkets, where the high quality of new supply commanded correspondingly higher rent, recorded increases in the average rent of 6.9% and 13.6% y-o-y, respectively.

Chengdu’s office investment market was quiet in 2014, with only one en bloc deal in the CBD submarket announced. Investors became cautious towards the Chengdu office investment market, due to the high levels of supply and corresponding high vacancy rate. However, the city’s fundamentals, including its population base, growing tertiary industry and status as a regional business hub will continue to attract investors to seek future opportunities in this market.

The supply of Chengdu Grade A offices has increased since 2012, however, the national economy has begun to adjust at the same period, with a deceleration of several economic indicators’ growth, limiting the support to the office market. Consequently, the market will require more time to absorb the large wave of new supply.

Chengdu’s Grade A office property market will see another massive expansion in 2015. Nine Grade A office completions are scheduled to launch, with a total GFA of approximately one million sqm, according to the completion progress. While some of these projects may launch in phases, the volume of new supply in the pipeline will clearly outpace demand in Chengdu, posing significant challenges for landlords. In particular, four new projects will be located in the Dayuan submarket and two will be located in the Financial Town submarket. However, these submarkets have large existing stocks but limited demand. As of 2014, these submarkets accounted for 35.2% of total stock but just 13.2% of net absorption. In the short- to mid-term, these submarkets and even the whole market will see strong downward pressure on both average rentals and the occupancy rate.

In the long-term, demand in Financial Town and Dayuan submarkets is expected to be created by October 2014’s official approval of the Sichuan Tianfu New Area as a national-level development zone, which will introduce supporting policies for financial investment, industry and land relevant to the Chengdu Hi-tech Zone (South) from 2015.


As such, the overall vacancy rate of Chengdu’s shopping centre property market decreased by 4.2 percentage points y-o-y to 7.1% as of the end of 2014, despite new supply. Accordingly, the annual net absorption in 2014 rose by 28.8% y-o-y to 910,540 sqm.

Nearly half of the new supply (by GFA) was added to non-prime areas in 2014, expanding the stock of non-prime areas accounted for 74.5% of the total stock, but rents in non-prime areas are greatly below the city average. In addition, more than 70% landlords to offer rental discounts or incentives to attract or retain tenants during 2H14. As a result, the average prime ground floor rent decreased by 19.1% y-o-y to RMB665.2 psm per month by the end of 2014.

Chengdu’s retail property investment market was quiet in 2014, and only one en bloc sale in a prime area was announced. Financial institutions, such as funds, banks, trust and insurance, remained interested, given the city’s status as the retail hub of southwest China, its rising incomes and its large population. However, A gap between property holders and investors toward capital values impeded the closing of transactions.

Another 13 shopping centres are expected to open in Chengdu in 2015, with a total retail area of more than 1.3 million sqm, based on current construction progress. Of this figure, 86.0% of new supply (by GFA) will add to non-prime areas, where demand and rent are growing slow in the short-term. In the prime area, the new supply will face a challenging environment with launched projects, which are mature and operating well. Consequently, this massive volume of new supply will dramatically increase competition among landlords in the market and pose significant downward pressure on the occupancy rate, average rent and yield.

Figure 3: Chengdu Mid- to High-End Shopping Centre New Supply, Net Absorption and VacancyRate

Figure 4: Chengdu Mid- to High-End Shopping Centre Ground Floor Rent and Change

“ The retail market was active in 2014, with the opening of several landmark projects. These developments attracted numerous international brands to enter Chengdu or expand their presence, and the high level of activity was reflected in a significant increase in net absorption from 2013”

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Retail Sales of Consumer GoodsRMB377.1 billion

On a broader perspective, the deceleration of economic growth and income per capita that resulted from the national economy’s adjustment in 2015, the correction of brands’ expansion, and the fluctuation of consumer confidence index will all have a significant impact on Chengdu’s retail property market.


Land Sales MarketThe Chengdu urban land market slowed over the course of year, from an active 1H14 to a sluggish 2H14, as many residential developers became cautious in light of weak sales performance. Despite several policies at both the national and city-level, including: the People’s Bank of China (PBOC) and the China Banking Regulatory Commission jointly issuing “The Notice on Further Improving Financial Services for the Real Estate Sector” in September, which supports and promotes both the first housing purchase and buying another house to improve living conditions; in November, the PBOC announced that it will cut the deposit and lending rates, lowering funding costs for developers and buyers; and the gradually relaxation of home purchase restrictions (HPRs) since 2Q14. The land market had yet to rebound by the end of 2014.

A total of 53 plots of land were sold in the Chengdu urban land market in 2014. These sites had a combined area of 1,920,712 sqm (excluding industrial use land), a decrease of 25.3% y-o-y. Fourteen of these plots were zoned for commercial use, representing a combined 202,913 sqm, down 49.0% y-o-y. The remaining 39 plots were all zoned for mixed-use (commercial/residential, or commercial/culture and sports), representing a total area of 1,717,799 sqm, or a 21.0% y-o-y decrease.

Correspondingly, the total transaction value decreased by 27.3 % y-o-y to RMB28.4 billion in 2014. Average accommodation value decreased by 5.4% y-o-y to RMB3,893 psm.

Headline land transactions in 2014 included Luneng Group’s purchase of a 114,835 sqm (GFA: 276,584 sqm) plot for commercial/residential use in Tiaodenghe, Chenghua District in April, for RMB2.6 billion or an accommodation value of RMB9,350 psm. This purchase marked the highest land transaction value and the third highest accommodation value in 2014. The highest accommodation value was recorded at Tuxin Group’s February purchase of a 6,936 sqm (GFA: 36,344 sqm) plot for commercial use in Yongsheng Street, Wuhou District, for RMB370 million or an accommodation value of RMB10,280 psm. Finally, Evergrande Group acquired a high-profile land site for commercial/residential use in Caojiaxiang, Jinniu

District. The developer purchased the 115,786 sqm (GFA: 728,884 sqm) site in June for RMB1.8 billion or an accommodation value of RMB2,469 psm.

The urban land market fluctuated obviously in 2014, where the market grew on a y-o-y basis in 1H14, but a number of failed, suspended or postponed sales were recorded in 2H14, due to the current large stock of residential and commercial projects and new supply, as well as the correction of resource allocation, and investors’ expansion of their scope to other sectors, resulting from the adjustment of economic structure. As such, the actual transaction rate (by the number of plots) fell from 90.9% in 1H14 to 42.6% in 2H14, with a decrease of total transaction area by 26.5% y-o-y in 2H14, though the total amount of land supply increased 32.1% from 1H to 2H14.

In October 2014, the State Council officially approved the Chengdu Tianfu New Area as a state-level development zone. The Tianfu New Area will bring development opportunities for industrial and commercial real estate, and the land supply in this area is expected to increase from 2015, in order to meet the development plans.

Looking ahead, the policies that were introduced in 2H14 are expected to have a positive impact on the market. However, the domestic real estate industry will stay in adjustment in 2015, considering the existing policies and economic growth trend, thus the market performance and financial credit condition are not likely to improve significantly. As a result, developers and investors will be more cautious about land purchases, and will focus on urban areas or the steady-developing areas in nearby counties.

�_�Z�O�$�}��z�$Figure 5: Chengdu Land Sales Area by Sector Figure 6: Chengdu Land Sales Revenue by Sector

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“An active first half was tempered by a slowdown in the second half of the year, resulting from weak sales of property, leading the total transaction area to decline from 2013’s level”


Copyright © 2014 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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chengdu property market 2014 review & …...6 chengdu property market 2014 review and 2015...

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