Archive for the ‘China’ Category

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Shanghai Moves Up The Global Investment Ranks

Friday, May 17th, 2013

Our Global Capital Flows research from the first quarter of 2013 suggests that Shanghai is well on its way to becoming a top destination for commercial real estate investment. In 1Q13, the city grew to become the sixth most active real estate investment market in the world, with a total of US$ 2.4 billion in transactions while in the same period last year, Shanghai ranked 19th globally. If we break down transaction volumes further to just cross-border investment, excluding domestic deals, Shanghai’s performance in Q1 was even more impressive, ranking fifth in the world and surpassing regional rivals Hong Kong and Singapore in total deal volume. Shanghai’s strength was underpinned by strong investment demand across Mainland China, which passed Australia and Hong Kong to become the sixth largest investment market in the world in the first quarter.

Most Active Cities for Investment in Q1 2013

At first glance, the flood of international capital into Shanghai seems to come at a strange time. Pessimism about China’s economy became more widespread in recent months after disappointing economic performance in the first quarter. A slowdown in expansion by international businesses has caused rental growth in Shanghai’s office and retail markets to slow, and rising residential prices, disappointing consumption levels and weakening retail sales growth all provided fodder for China bears.

It therefore may seem counterintuitive that some of the largest and most respected global investors are increasingly favouring Shanghai as a destination for capital. Several of the leading global private equity firms have recently made large purchases in Shanghai. Both Blackstone and Carlyle, for example, purchased office properties in the Shanghai CBD in the past two quarters. So why are these players so optimistic about the medium-to-long term prospects for Shanghai?

My hunch is that most of these investors have looked beyond the short term negativity caused by a slowdown in the pace of China’s growth and are concentrating on the big picture. Right now, they have the opportunity to purchase property in the financial and economic centre of what is by far the fastest growing large economy in the world. Even if China’s economy slows from 8% growth to 7% growth in the next few years, 7% growth still beats prospects in Europe and North America by a wide margin. On top of that, prime office yields are higher in Shanghai than in New York, London, Tokyo, Paris, and Hong Kong, meaning investors in office assets, Shanghai’s most popular sector, can lock in strong returns while also capitalising on future growth prospects. Despite negative headlines about the state of China’s economy, the upside potential here will continue to drive increasing investment in real estate assets.

About the author
Daniel Odette is a Senior Analyst in Jones Lang LaSalle’s research team in China, based in Shanghai.

Posted in Capital Markets, China, Investment Research | No Comments »

Time For Another Look At Five New Measures In China

Thursday, May 9th, 2013

It has been over two months since the Central Government announced the “Five New Measures” in early March. How have these measures worked so far? The new round of tightening policies was aimed at taming housing price growth by addressing several key issues, such as continuing to implement HPRs, increasing the supply of small- to medium-sized apartments and discouraging investment purchases by increasing transaction costs. As we stated right after the announcement, the new measures remained consistent with the structure of the existing policy regime, and the emphasis was placed on the detailed implementation of the measures at the local level.

Following the announcement from the Central Government, many city governments waited until the end of March to reveal their local implementation details. However, most of them failed to address some of the key issues, and Hainan Province even refused to implement the new measures. At the time of writing this article, only the Beijing city government had enforced the implementation of a 20% capital gains tax, while the governments of cities like Shanghai and Guangzhou have not given an explicit timetable for implementation.

It has long been our view that there are sufficient government policies in place in China to help stabilise the market. It is the lack of enforcement and strict implementation of those policies that has led to the problem of prices rising too quickly. A good example is the HPRs, which were introduced in over 20 cities in 2011 but got gradually loosened throughout 2012. Local governments at the city level have been very reluctant to enforce national policies as their revenues have a heavy dependence on the real estate industry, with land sales being a key revenue source.

Sales volume across the major cities started trending downward in April. We believe this will result in a stabilisation in prices over the next few months if sales remain subdued. However, this volume slowdown is due to a spike in activity before the local governments made their announcements at the end of March rather than because enforcement and implementation are more strict. Over the past two years, the market has been driven primarily by first-time homebuyers and upgraders, who are the participants the government should and will continue to support. Investors and speculators can be kept out of the market as long as the existing measures are enforced and implemented strictly at the local level. An additional policy we think is needed for the long-term sustainability of the sector is the property tax, which would help rationalise purchase incentives and create a steady revenue stream for local governments, reducing their reliance on land sales.

About the author
Joe Zhou is the Head of Research for Jones Lang LaSalle in Shanghai.

Posted in China, Public Policy, Residential Research | No Comments »

Air Quality Remains A Problem In Beijing

Thursday, April 18th, 2013

As I sit down to write this blog, the US Embassy in Beijing is reporting a reading of 52 on its PM 2.5 Air Quality Index. This translates as ‘Moderate’ and looking eastwards out of our office window, the sky is blue and all looks well in the Chinese Capital. Today, however, is the exception rather than the rule. Air quality readings have gone off the scale on more than one occasion in 2013 and Beijing has come under the media spotlight like never before. I will focus on Beijing in this blog but the city is just one of many across China currently dealing with air quality issues.

It was recently reported that China will spend RMB 100 billion (US $16 billion) on tackling pollution over the next three years in Beijing and sustainability was discussed at the recent National Party Congress in March. Significant improvements, however, will not happen overnight and for now, air pollution remains a fact of life for those of us living here.

When the US economist Charles Tiebout first coined the phrase voting with your feet more than half a century ago, he was referring to an individual’s ability to choose a location based on, amongst other things, taxes and public goods. I don’t suppose Tiebout ever factored air quality into his calculations but it doesn’t take a great leap of the imagination to apply the concept to the situation we currently face in Beijing. Anecdotal evidence in recent media reports suggests that expats and locals alike may be considering leaving Beijing and recent conversations with friends and acquaintances, particularly those with young families, back this up.

If individuals vote with their feet, then the same must go for organisations. Quality of life factors are a important criteria in choosing a location for many service sector operations, and those quality of life issues inherently include environmental factors. Recent media reports suggest that some firms are experiencing difficulties in persuading senior executives to relocate to the Chinese capital. All other things being equal, it is not difficult to envisage a situation whereby some firms would opt to locate in a less polluted city or country in order to more easily attract top talent.

All other things, however, are not equal. China is central to the growth strategies of many international firms and the Beijing office market, to an extent, benefits from relatively inelastic demand due to the perceived need to be close to the domestic power base. Huge net absorption and massive rental growth in recent years, 1Q13 notwithstanding, are testament to this. From a personal perspective, air pollution (and overcrowding) aside, Beijing remains a great place to live and work and the drawbacks are more than offset by all of the other things that the city has to offer.

About the author
James Taylor is Assistant Manager in Jones Lang LaSalle’s research team in China, based in Beijing.

Posted in Air Quality, China, Office Markets, Pollution | No Comments »

Bus Rapid Transit In China: Gaining Traction With Planners And Developers

Monday, April 8th, 2013

Discussions of transportation in China tend to be dominated by awe-struck descriptions of massive infrastructure projects: the nation-wide bullet train system, or the elaborate metro networks being tunneled underneath most large cities. Amidst the imagery of sleek trains and rails, however, it is easy to neglect another trend that is quietly changing the face of urban transport in many Chinese cities: Bus Rapid Transit (BRT).

BRT is often summarised as a metro rail system with tyres, and at its best can achieve the advantages of a modern subway at costs closer to conventional bus lines. Its signature distinction compared to regular buses is dedicated lanes that are off limits to other vehicles, allowing speedy passage even in rush hour traffic. Planners often add other sweeteners like comfortable stations, metro-esque payment gates, and spacious carriages. Early successes in Latin America proved that BRT could boost transit ridership while reducing congestion and pollution. BRT has been embraced over the past decade in over 130 cities, many in developing countries that lack the scale or resources to build true metro networks.

China’s first BRT route was implemented in 1999 in Kunming, and today there are BRT systems in fifteen cities, with a dozen more planned. The cities range from Tier 1 metropolises like Beijing and Guangzhou to Tier 4 and 5 towns like Yancheng and Yinchuan, and the BRT systems vary from one or two lightly-implemented routes to fully equipped metro substitutes with multiple offshoot ‘feeder’ lines. Some efforts work better than others: planners can be tempted to treat BRT as a poor man’s subway, skimping on amenities or forcing buses to sometimes intermix with regular traffic, defeating the purpose of dedicated lanes. BRT succeeds when cities put their full muscle behind it: see Guangzhou’s massive BRT system, whose 273 km network extends along a main trunk line to a number of feeders. Buses stop at stations as frequently as every ten seconds, and the system has daily ridership of over 800,000 people – more than most Chinese metro lines.

Well-designed BRT systems are capable of supporting urban development. Xiamen’s BRT network facilitates access to emerging decentralised residential and commercial clusters. BRT routes also can create natural urban hubs as they concentrate workers, consumers, and residents at key stations, boosting property values and rents within the system’s catchment areas. BRT’s more closely-spaced stops and generally lower ridership may mean the effect on real estate will be less pronounced than near metro stops. BRT thus may be outshone in cities where it coexists with flashier subway networks, but it can play a larger role in Tier 3 cities which are too small for metro systems. A case in point is Jiangsu Province’s Changzhou, which has 50 km of dedicated lanes stretching from the suburbs to most retail clusters. On a retail survey this quarter, we observed several upcoming projects that emphasised convenient BRT access as a primary selling point. Developers there are embracing the necessity of serving this promising new mode of consumer access.

About the author
Warner Brown is an Assistant Manager in Jones Lang LaSalle’s research team in China, based in Shanghai. He has lived in China for four years and has a background in urban planning.

Posted in China, Urban Issues | No Comments »

China’s Brave New World

Wednesday, April 3rd, 2013

March was an eventful month for China’s property sector. It started with a policy announcement before the start of the National People’s Congress and was followed very closely by two very one-sided stories on the American television program 60 Minutes.

The policy announcement was something of a surprise in terms of its timing and content and raised a huge amount of interest among the local and international media. While basically aligned with the existing policy regime, it focused on several loopholes in how these policies have been implemented which have allowed for investors to get more active in the market in the several prior months. The immediate response in the market was for existing owners of investment properties who were thinking about selling, to try to front-run a change in how the capital gains tax was to be implemented.

However, by the end of the month, announcements by local governments about how they plan to implement these ‘5 new measures’ were pretty underwhelming. Other than the city of Beijing, most have simply reiterated their existing policies and few have made any mention of the capital gains tax. For now it seems like it’s back to business in the residential sector. But I would expect China’s new leaders to crack the whip, so to speak, if the government’s monthly price index shows continued increases in the majority of cities. The ‘5 new measures’ if fully implemented, could have a dramatic impact on the market, but only time will tell if policymakers have a stomach for the degree to which that could slow the broader economy.

The 60 Minutes story on the other hand raised a lot of interest from friends and family back home who were suddenly worried about what a ‘bubble’ in China could mean for them. As a long time viewer of 60 Minutes, a show that I have often called the best program on television, I was disappointed by their near complete lack of balance in presenting the story. Their ‘expert’ analyst was someone who has long made his name (and livelihood) from the ‘China Bear’ story and they fell for the easiest trap when it comes to reporting on China – is this particular anecdote indicative of a larger problem – basically is what we are seeing here happening all over China. Their ‘expert’, of course, said ‘yes, we do see these empty malls and ‘ghost cities’ all over China’.

We beg to differ.

China is a big place. It is possible to find anecdotal evidence of virtually any point you want to make. Every quarter I send over 40 research analysts into the field to track the office, retail and residential property markets in 20 large cities in China. We have arguably the most comprehensive database of commercial properties in the country. Are there bad malls in China? Sure. Have ghost cities been built? Undoubtedly. Do they represent the majority of construction activity? Or even a meaningful minority? No chance.

China’s golden age of investment led growth will come to an end, and probably sooner than most people think, but the country’s leaders are pragmatists, not ideologues. They do not have their heads buried in the sand the way I fear the leader of most Western democracies do. The top priority of the new generation of leaders is to transition the economy toward consumption led growth. They will introduce market mechanisms for interest rates and the allocation of resources in the economy; they will promote private enterprise; and they will reform the sclerotic state owned enterprises that predominate the economy. These reforms will be painful; they will necessarily mean China’s economy will grow more slowly than we’ve seen in the past; and there is no guarantee that China’s leaders will get it right. But the rest of the world has a lot riding on the outcome, whether we like it or not. So we should pay attention and try to get the facts right, to the extent that is possible.

About the author
Michael Klibaner is the Head of Research for Jones Lang LaSalle in Greater China, based in Hong Kong.

Posted in China, Economic Research, Residential Research, Uncategorized | No Comments »

New Retail Developers Are Getting The Ingredients Right

Thursday, March 28th, 2013

On recent trips to Nanjing and Xi’an, I was pleasantly surprised at the high quality of new domestically-developed shopping centres. Wonder City, the West market, and Deji Plaza Phase 2 all seemed to be getting the “ingredients” right for success. These projects were built by relative upstarts – new retail developers without any previous track record or existing retail portfolio – with the exception of Deji Plaza Phase 1. High quality tenants, tasteful interiors, clean circulation, and full ownership by the developer, were just some of the things that were planned well in spite of their recent entry to the industry.

It wasn’t long ago that high-quality domestically developed shopping centres were the exclusive domain of big national players like Wanda and COFCO. They have taken a decade to perfect their version of what a mass market mall should look like and how it should operate. They understand how and why shopping malls are not the same thing as department stores or street-side shops. They have centralised operations with deep retailer and distributor relationships. In the past few years, their formula for success has been replicated reliably in new centres across the country. Former staff from players like Wanda, as well as foreign mall operators have facilitated the spread of the shopping mall concept far and wide across the country.

But most importantly, the new upstarts are leapfrogging their predecessors by not repeating the same mistakes. Instead they are looking at the benefits of holding the asset for the long term and making the commitment required to nurture their shopping malls to maturity. Previously, new retail developers almost always followed the fastest path to returns, equating retail with residential: a simple churn formula – build and sell – involving basic shell construction, and strata titling to whomever would buy, with no management of tenant mix or adjacencies. These properties usually went into a tailspin of unsightly decay and even dereliction within a few years.

Wonder City couldn’t be more different. Sales density figures were respectable for its length of operation, in spite of what seemed to be a complete dependency on shoppers who drive to the centre. Warmly coloured interiors, a rich selection of national and international brands, column free store fronts, good attention to detail, and more importantly, clean restrooms, made the mall a pleasure to walk around in and browse. Even the handrails were sturdy and served more than a decorative purpose. And this is exactly what the creator of the shopping mall concept, Victor Gruen, intended – a place where customers would want to extend their visit and consume more.

About the author
Steven McCord is a Local Director in Jones Lang LaSalle’s research team in China, focused on pan-China retail. He is based in Shanghai.

Posted in China, Retail Research | No Comments »

Domestic Demand Is Changing Guangzhou Office Market

Friday, March 22nd, 2013

Guangzhou will have 2.2 million sqm of Grade A office space coming on stream in the next five years. It is natural that investors have some concern that vacancy rates will rise and put pressure on rents. However, 75% of Guangzhou’s Grade A office stock has been completed since 2005 and rents have proved to be resilient in that time. Our data show that annual rental growth in the past three years averaged 7.1% in the face of nearly 1.5 million sqm of new office space. In particular, in 2011, when a historic peak in annual supply of 630,000 sqm was delivered to the market, net absorption also reached a historic high at 550,000 sqm, with average rents rising by 9.4% y-o-y. On the other hand, in 2012, when leasing demand softened across China, rents retreated by 3.2% y-o-y.

Not surprisingly, part of this high quality office space was built for headquarters or pre-sold to cash-rich domestic Chinese occupiers, who continue to actively purchase bulk office space for self-use. That explains part of the correlation we have observed in China between speculative supply booms and net absorption.

There are two elements we have seen contribute to the surprisingly strong rental performance of China’s emerging office property markets in times of seemingly high vacancy. First is that vacancy in the market tends to be concentrated in the handful of newly completed buildings, while existing buildings in the market are nearly fully occupied. This allows landlords of these stabilised buildings to achieve pricing power and increase rents even when the market level vacancy rate appears to be high. Second, many of the developers of office buildings in Guangzhou have their background in residential development, not commercial real estate. When credit conditions get tight, they would sooner look to sell the office building on a strata-title basis to raise capital, rather than lower rents. This has the effect of reducing some of the competition with single owner, lettable buildings, and reducing some of the rental pressure in the market.

Among owner occupiers, where the company, often a Chinese state owned enterprise (SOE), does not fill the entire building, we have seen a tendency to leave the space empty rather than lower rents. These SOEs are typically cash rich and have the holding power to endure periods of high vacancy. In addition they tend to place a high value on the tenant mix in their headquarters buildings and are ‘picky’ about who they will lease the space to.

With respect to the large future supply of Grade A office for Guangzhou, the market will need both strong demand from domestic corporates, as well as renewed expansion among MNCs. In the last year we have seen multinational firms take a cautious approach to China and their real estate plans, so for now it’s a “Chinese story” of how domestic tenants and landlords deal with the potential oversupply scenario in Guangzhou. As a result, we are currently forecasting a second down year for rents in 2013, although admittedly by a small margin at -0-5%, but reflecting the fact that it will take strong demand for the market to hold up and absorb all of this supply.

About the author
Silvia Zeng is the Senior Manager of Research for Jones Lang LaSalle in Guangzhou, China.

Posted in China, Office Research | No Comments »

The Driving Force Behind Beijing’s Office Demand

Thursday, March 7th, 2013

It is characteristic of Beijing that owner occupiers play an important role in filling up much of the office space in certain office submarkets of the city. In two of the three largest office submarkets, Finance Street and East Second Ring Road, owner occupiers have taken up over 70% of the Grade A office space. A big chunk of these spaces are owned and occupied by state-owned enterprises (SOEs); some of which have revenues big enough to be ranked in the Global Fortune 500.

There are now 44 corporate headquarters of firms in Beijing that have a ranking on the Global Fortune 500; far more than any other city in China. This number has grown from 18 back in 2007, highlighting the fast growth of these SOEs in recent years and partly justifying the quick run-down in vacant office space in Beijing amid a supply boom since the Olympics year. Close to a third of these companies occupy their own Grade A buildings whereas the rest still sit in their own non-Grade A assets. In other words, these companies alone own and occupy some 1.2 million sqm of Grade A space, or 20% of the city’s total Grade A office stock.

The government plans to extend the boundary of the CBD eastwards and a total commercial GFA of over 2.5 mil sqm will be built from 2016/2017 onwards. A big portion of this is expected to be for office usage, leading to some concerns as to whether this will lead to huge vacancy and rental pressures in due course. If we take a closer look at the ownership of these sites, we understand that the majority of these office spaces are to be reserved for self-occupation purposes and many will become headquarters of banks, local conglomerates and insurance companies.

So, yes, the trend of companies occupying their own office premises will likely continue in Beijing. The continuous growth of many SOEs suggests they may become larger occupiers and have bigger appetites for office space in the city.

About the author
Marcos Chan is the Head of Research for Jones Lang LaSalle in North China, based in Beijing.

Posted in China, Office Research | No Comments »

Developers Switch Back To China’s Top Tier Cities

Wednesday, February 20th, 2013

China’s stock market started 2012 pessimistically but ended on a strong note. So it was with the residential market as well, where transaction volumes rose by 39.3% from a year ago for the 20 cities we monitor, as detailed in the chart below. As we expected, industry consolidation accelerated throughout the year as the top developers continued to outperform their peers. According to the data from China Real Estate Information Corporation, sales revenues of the top 10 developers in China increased 30.6% y-o-y to RMB 822.2 billion in 2012, with their combined market share growing approximately 2 percentage points to 12.8% in 2012.


Source: CREIS

The top developers’ rising sales revenue allowed them to step up their budgets for land acquisitions in the second half of 2012. For instance, Vanke, China’s largest developer by market value, spent about RMB 70 billion on land acquisitions in the second half of 2012. Similarly, Poly spent nearly RMB 30 billion on land acquisitions in 4Q12 alone. According to the data from CREIS, the total expenditure on land acquisitions by the top 10 developers reached RMB 175.3 billion in 2H12, up 50% from 1H12. In addition to the renewed interest by developers for land acquisitions, there also was a noticeable change in developers’ strategies in 2012. After several years’ aggressive expansion into lower-tier cities, the top developers are now switching back to top Tier I and II cities, such as Shanghai, Beijing, Hangzhou, Chengdu, Chongqing and Wuhan. A key reason for this change lies in the fact that the market fundamentals in the higher-tier cities look much healthier in the short to medium term than in the lower-tier cities.

Despite the high land costs, the supply pipeline in top Tier I and II cities is much more manageable than in lower-tier cities. A significant portion of Tier I and II cities’ populations are composed of college graduates from other cities and provinces seeking a place in the growing white-collar workforce in which salaries are higher and opportunities greater than back home. Jobs in many smaller cities offer less potential for career growth, and are considered to be less meritocratic. Shanghai, a top Tier 1 city, is viewed as the land of opportunity where the private sector is very large and the playing field is more flat. Immigrants thus provide a steady pool of potential buyers to the residential market in top Tier I and II cities. In contrast, lower tier cities often face very large supply pipelines relative to their pools of potential buyers. In the short to medium term, lower-tier cities’ large pipelines are likely to result in further price corrections, while in the top Tier I and II cities, developers can gain competitive advantage by developing high quality projects instead of only lowering prices. That said, the lower tier cities do offer several promising prospects in the long run, such as fast-rising urbanisation rates and low land costs.

About the author
Joe Zhou is the Head of Research for Jones Lang LaSalle in Shanghai.

Posted in China, Land Supply, Residential Research | No Comments »

Renaissance For Shanghai’s Hongqiao CBD?

Thursday, February 14th, 2013

Recent years have seen maturing urban infrastructure combine with strong office and retail demand to give rise to new commercial clusters along the periphery of Shanghai’s city centre. One of the most prominent emerging areas is Hongqiao, which has a unique history. Hongqiao, previously an important office and retail area in Shanghai, faded from prominence in the 1990s, but today returns stronger than ever. New developments are restoring Hongqiao to its former prominence.

Once a rural area in western Shanghai, Hongqiao was designated as a state-level development zone in 1986. Authorities took advantage of the zone’s location between Hongqiao Airport (Shanghai’s only international airport at the time) and Shanghai’s traditional centre to develop a commercial hub with exhibition space, offices, hotels, and diplomatic facilities. The 1990s saw a wave of development that cemented Hongqiao’s rise as one of Shanghai’s key early business districts. More than ten office towers were built, and the zone attracted a range of multinational companies like 3M, Chrysler, GE, and LG. In addition, at least half a dozen foreign consulates were established in the area. Hongqiao’s Friendship Department Store opened in 1994 and became the most high-end retail property in Shanghai, with international brands and imported products. As other areas like Lujiazui (the financial district) and Xujiahui (in the southwest) took centre stage in the late 1990s and early 2000s, demand and supply in Hongqiao’s office and retail sectors declined, and Hongqiao’s brightness began to fade (see chart below). The turning point came in 1999 when Pudong International airport, 60 km east, took over all international flights to Shanghai.

Hongqiao is experiencing a surge of construction of prime office and retail space that is giving it a new lease on life. Notable new mixed-use projects include L’avenue by LVMH, The HQ (Shanghai City Centre) by Treasury Holdings, GIFC Phase II (Takashimaya) by Gubei Group, Jin Hongqiao by APP and SOHO’s Tianshan Road Project. All of these have just completed or will complete within the next three years, doubling the retail stock of the area. We reclassified Hongqiao from a decentralised area to a part of Shanghai’s CBD in 2011, due to the comprehensive upgrade of the area’s business environment. For example, L’avenue will be home to the first Louis Vuitton and Tod’s stores in west Shanghai. Meanwhile, the commitment rate of GIFC Phase II’s office portion (70,000 sqm) has already exceeded 60%, higher than the average of other CBD projects that delivered in the same quarter.

Hongqiao’s profile will be further boosted by the rising prominence of the west Shanghai region, which is underpinned by the new Hongqiao Transportation Hub, including a hugely expanded airport. Tenants are attracted to Hongqiao for its new properties, strong government support, and large, wealthy population base. As a result, we expect that Hongqiao’s rental performance will remain sound and will experience stronger rental growth than most areas in Shanghai.


Source : Jones Lang LaSalle, Real Estate Intelligence Service

About the author
Evian Zhu is Assistant Manager in Jones Lang LaSalle’s research team in China, based in Shanghai.

Posted in China, Real Estate Research | No Comments »

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