Despite warnings of a slowdown and central government efforts to curb overheating, China's real estate market remained fundamentally sound in the third quarter of 2007. While the property sectors of first-tier cities continued to grow steadily, investors and developers remain optimistic about opportunities in emerging second- and third-tier cities. Analysts remain divided on the repercussions of the U.S. subprime problem in China, but it appears that the Chinese market is largely insulated from its effects. However, more attention will likely be paid to risk management in the future.
First-tier Cities: Beijing, Shanghai and Guangzhou
BEIJING
During the third quarter of 2007, demand for Beijing real estate witnessed an upswing. The prime office market was active as take-up reached 162,545 sm, an 18.3% rise q-o-q. The average rent grew slightly, a 1.6% rise q-o-q to RMB 186 psm per month. Beijing's luxury residential market in the third quarter was more active than the first half of 2007, especially in the serviced apartment leasing market, as many foreign enterprises renewed old contracts or signed new ones in the last three months, thereby increasing demand in the leasing market. Serviced apartment rents rose by 1.2% q-o-q to RMB 216.4 psm per month. Big retailers are generally optimistic about retail market prospects in Beijing and are accelerating their entry; demand for prime retail property is robust. Ground floor and first floor rents increased by 0.5% q-o-q and 3.3% q-o-q, reaching RMB 28.6 psm per day and RMB 19.1 psm per day, respectively, in the third quarter. Meanwhile, demand for industrial properties grew steadily within the period un der review, with average rent of industrial property recording at RMB 53 psm per month, a 1.9% rise q-o-q, while the price of industrial land reached RMB 1,213 psm, a 1% rise q-o-q.
SHANGHAI
Every sector of the Shanghai property market expanded in the third quarter, with the industrial property sector posting the best performance. Grade A office rents registered 2.8% q-o-q growth, while rents for Grade B properties increased by 2.7% q-o-q. The vacancy rate dropped by 0.9 percentage points q-o-q to a record low of 3.5%. Metro Plaza in Changning and Urban Development International Tower in Xuhui came on stream, adding 63,667 sm of new office space to the market. Meanwhile, the luxury residential sales market continued to rebound. First-hand luxury property transactions reached 1,149 units per month within the quarter, 38% greater than the second quarter's peak season. The capital values of both luxury apartments and villas registered further growth. The leasing market also maintained steady performance with further rental growth in luxury villas and serviced apartments. In the retail sector, prime ground floor rents continued to increase, with 1.6% growth q-o-q to RMB 41.2 psm per day, while increasing competition from secondary retail areas resulted in a downward correction for first floor rents in prime retail locations. The industrial land price rose by 15.6% q-o-q largely due to continued government control of the land supply. Land supply scarcity has led some companies to adopt a leasing strategy, fuelling demand for high quality industrial properties. The average rent of industrial properties rose by 6.7% q-o-q to RMB 33.7 psm per month in the third quarter.
GUANGZHOU
The Guangzhou property market was active in the third quarter. Rentals for prime office and retail space, and capital values for luxury residential witnessed moderate to substantial growth in the period under review. The Guangzhou prime office market was buoyant over the past three months, with the average rent and capital value of prime buildings increasing by 6.4% q-o-q and 5.1% q-o-q, respectively. Taihua Real Estate (China) Company paid a record price of RMB 1.09 billion to secure plot B1-3 in Pearl River New City for an office development, which was equivalent to an accommodation value of RMB 11,912 psm. As for the residential market, significant price increases were seen in the high-end segment. The average capital value of luxury apartments grew by 10.8% q-o-q while that of villas rose by 11.8% from the previous quarter. Driven by strong demand from both multinational and domestic retailers for quality retail space, rental levels for Guangzhou prime retail properties recorded moderate increases in the quarter. Average monthly rents for ground floor space in shopping malls went up by 7.3% q-o-q to RMB 47.3 psm per day, and the overall vacancy rate dropped by 1.1 percentage points q-o-q to 8.7% at the end of the quarter. The industrial sector reported relative stability in the third quarter with industrial rents remaining level. As industrial land resources in industrial parks like Science City becoming scarce, access to industrial facilities is likely to become more competitive.
Second-tier Cities: Dalian, Tianjin and Hangzhou
DALIAN
Demand was stable in the prime office market during the third quarter, and average rents increased moderately as vacancy levels continued to drop. Overall rents reached RMB 63.6 psm per month, growing by 1% q-o-q. The average vacancy rate declined to 20.1% in September from 20.6% in June, with no new completions registered during the quarter. Leasing activities are relatively muted and most transactions were concentrated in the Grade B office market. As no new completions were reported in Dalian's retail market during the quarter, the vacancy rate was down 0.5 percentage points q-o-q to 2.2% at the end of September. Ground floor rents rose by 1.1% q-o-q to RMB 25.4 psm per day, while first floor rents reached RMB 16.9 psm per day, a moderate increase of 0.2% from last quarter.
TIANJIN
The Tianjin prime office leasing market remained relatively stable in the third quarter, with the average rent reaching RMB 98.7 psm per month, an increase of 0.2% q-o-q. As no new supply came on the market, the vacancy rate fell by 1.4 percentage points q-o-q to 17.7% in September. In the strata-title sales market, there were very few properties for sale and prices increased steadily by 1% q-o-q to RMB 12,500 psm. With major properties under renovation, the prime retail property vacancy rate rose to 14.4%. However, daily ground floor and first floor rents increased by 0.4% q-o-q and 1.8% q-o-q to RMB 16.7 psm and RMB 9.8 psm, respectively.
HANGZHOU
As there was no new prime office supply in Hangzhou in the third quarter of 2007, average office rents saw accelerated growth, rising 1.6% q-o-q to RMB 107.3 psm per month, and the overall vacancy rate dropped 0.9 percentage points q-o-q to 10.6%. Prime office strata-title sales prices enjoyed continuous growth, with the average price rising 6.2% q-o-q to RMB 15,788 psm. More office buildings in Qianjiang New City are due to come on the sales market in the first half of 2008. In the office sales market, Bank of Communications acquired the 43,229-sm Bluewhale International Building at approximately RMB 15,000 psm. Strong demand and lack of new supply in the Hangzhou prime retail market kept vacancy levels low at 2.7%. In this quarter, rentals for ground floor and first floor recorded q-o-q growth of 4.2% and 3.7%, respectively, to be recorded at RMB 19.8 psm and RMB 16.1 psm per day.