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News Release

Hong Kong and Macau

Worsening Economy Weakens Demand for Commercial Properties in Guangzhou

According to Jones Lang LaSalle’s First Quarter Property Review

Hong Kong and Macau, April 21, 2009 – According to Jones Lang LaSalle’s 2009 First Quarter Property Review, demand for commercial property in Guangzhou from foreign-invested enterprises remained stagnant, resulting in the net absorption of Grade A offices hitting its historical low since 2005. In 1Q09, most of the demand for office space came from domestic companies. Meanwhile, demand for industrial parks was dampened due to the impact of the slowing global economy; whereas logistics parks maintained a balance between supply and demand, keeping rental stable. Retail space had mixed performances, with average rental decreasing by double digits in 1Q09. Due to the reduced price, favorable policies, and easing of credit, transaction volume in the mass residential market picked up slightly, but the high-end residential market failed to revive. Some domestic buyers and investors returned to the market. Despite the reduced number of individual overseas investors, overseas institutional investors were still positive about China’s real estate market. “The market has not reached its bottom in 1Q09, and most buyers and investors are still adopting a wait-and-see attitude. However, demand from local companies is reviving, slightly improving the overall market sentiment,“ noted Jex Ng, Managing Director at Jones Lang LaSalle Guangzhou.
Grade A Office
In 1Q09, Grade A offices in Guangzhou recorded a net take-up of only about 2,500 sqm, down 82% q-o-q, the lowest since 1Q05. The sharp decline in take-up was mainly due to the uncertain outlook of the global economy, with most MNCs adopting a cautious stance on expansion plans, pushing down demand for office space. To save operating costs, some companies started to consider relocating to buildings with lower rental in the non-CBD area, and a few companies even terminated their leases. Another reason for the drop in take-up was the lack of new supply.

No new supply was completed in 1Q09, and the overall vacancy rate remained as high as 21.2%, almost the same level as that in the last quarter. Due to the combined factors of decreasing demand and rising pressure on vacancy rate, most office building owners in the city provided a series of incentives to attract or retain tenants. As relocation costs became much less tolerable to tenants, the pressure upon owners of future new supply became apparent.
Average rental and capital values of Grade A offices in Guangzhou continued decreasing, down by 8.8% and 10.1% q-o-q, respectively. However, compared with other financially developed cities in China like Hong Kong and Shanghai, Guangzhou’s office market suffered less impact from the financial crisis and thus its rental declined moderately.

In comparison to the weak demand from foreign-invested companies, local companies had a relatively stable and strong lease demand. Some local companies seeking to enhance their images took advantage of decreased rental, moving to prime Zhujiang New Town or Grade A office buildings in Tianhebei. One of the good examples is Sunshiny, which relocated into International Finance Place.

In the short term, nearly 400,000 sqm of new supply will be completed in 2009, adding even greater pressure to the market. As all new supply, including R&F Winner Plaza, Onelink International Plaza, Poly Center, Guangdong Globelink Building, and G.T. Land Plaza (Phase II), will be located in Zhujiang New Town and Tianhe, competition in these areas will intensify. According to Victor Mar, Head of Markets at Jones Lang LaSalle Guangzhou, the Grade A office market in the city still has to face a tough time by end-2009, and “due to the combined effects of decreasing demand and increasing supply, we expect the vacancy rate to keep climbing, and annual rental and capital value will see a double-digit drop for the whole year.”
The global economic recession has slowed down the demand for Chinese goods, leading to the dramatic decline of China’s export volume. Meanwhile, demand for industrial parks was weakened by reduced demand in software development and outsourcing services, making it more difficult for parks to attract investment. After seeing its first drop in the last quarter, average rental in the industrial park market continued its downward trend, down by 2.4% q-o-q.

Guangzhou’s export kept declining. However, as its logistics sector focuses on retail in southern China and domestic trading, its total retail sales of consumer goods recorded an increase of 8.3% y-o-y in 1Q09, and the negative impact of the global economic crisis was partially offset by domestic demand. As a result, there was a balance in supply and demand in Guangzhou’s logistics park market, helping rental rates to remain stable in 1Q09.

A number of new supplies will be completed by end-2009, including R&F International Airport Logistics Park within Jingu Industrial Park in Huadu district and several GLP projects in Guangzhou. The sufficient supply will inevitably have an adverse effect on the overall vacancy rate, leading to further drops in rental. One of the industrial parks completed in 1Q09 was Panshan Venture Park in Panyu Energy-Conserving Science Park. New supply in 2009 includes a KWG project in the science park.

Due to the uncertain outlook of the global economy, overall demand for industrial properties in Guangzhou is still expected to show a downward trend this year. According to Eddie Fu, Head of Industrial at Jones Lang LaSalle Guangzhou and Shenzhen, “Although the macro environment is not favorable and the growth in domestic demand has slowed down, we still believe that retail sales will remain dynamic in the city. Meanwhile, retailers have certain demand for quality warehouses with advantageous location and excellent specifications.”

During the first quarter, retail sales of consumer goods increased by 8.3% y-o-y. This indicates that the economic slowdown has not yet produced material impact on retail sales. However, it should be noted that the growth in retail sales, particularly the large and luxury consumption, has slowed down significantly compared with that in the same period of last year (16.1% y-o-y). Furthermore, as a result of the economic downturn and high comparative base, Guangzhou witnessed its first CPI drop in recent years, down by 1.2% y-o-y in January–February 2009. This suggests that domestic consumption was weakening.

However, the mass consumer goods industry and large retailers were less impacted by this development. For example, JUSCO, a large retailer in Japan, is still pushing through with its expansion plan to open two new stores in the near future.

At the same time, most retailers have started to evaluate the profitability of their outlets, tending to be more cautious in the renewal of their leases. Shopping centers had mixed performances in 1Q09. Facing increased pressure, owners of some shopping centers in the non-core area reduced rental in order to attract new tenants. This resulted in an 11.5% q-o-q drop in overall rental, the first double-digit drop since 2006. However, rental in the core business area, such as Tianhe district, remained stable. Bercy Plaza, located in Tianhebei, was officially opened in 1Q09, adding 40,000 sqm of new supply to the market.

A number of middle-end and high-end commercial properties focusing on trade mix will be completed within the year, including Onelink Walk in Tianhe district, GT Land Plaza in Zhujiang New Town, and Metropolitan Plaza in Huangsha, pushing up the overall vacancy rate of retail space. Meanwhile, retailers will remain cautious to expand in 2009, with large flagship stores being most significantly impacted. Therefore, it is expected that retail space in the non-core area will remain under greater pressure, leading to a drop in average rental for this year.

Simon Lam, Head of Sandalwood* Guangzhou and Shenzhen, noted that, “Compared with the retail market in Western countries, chain stores are still popular in China’s retail market. As large chain stores are slow in entering the Guangzhou market, we expect that new retailers will be attracted to Guangzhou after the completion of new large shopping centers.”

The mass residential market witnessed a slight recovery in 1Q09. The increase in transaction volume was mainly attributed to the release of the pent-up needs for self-use that was spurred by the price decrease, easing of credit, and policy incentives since last year.

Developers regained confidence from the increasing number of transactions for mass residences and narrowed the range of price concession. However, most buyers still adopted a wait-and-see attitude, expecting the price to drop further. Marcos Chan, Head of Research at Jones Lang LaSalle Greater Pearl River Delta, noted that, “Developers are running counter to the buyers’ price expectation, resulting in market stagnation. The economy is expected to bottom out and transaction volume will grow stably, but there would be little possibility for rental and sales price to see significant rise.”
Furthermore, as most policies and measures launched recently were targeted to mass residences, they have produced limited impact on the luxury residential market. As the demand for luxury residences is largely for investment, the fact that the current economy and investment environment were still uncertain and that foreign enterprises reduced housing subsidies for employees to save on operation costs had largely affected leases, result in a gloomy investment sentiment for the luxury residential market. Sales price and rental recorded a drop of 4.9% and 5.5% q-o-q in 1Q09, respectively. In terms of sales, with transaction volume at about 480 units, sales of new luxury houses did not pick up in 1Q09, remaining the same as the level in 4Q08.
As the stock market stabilized and credit eased in China, some domestic investors regained their confidence, and investment in the property market picked up slightly in 1Q09. The number of overseas investors decreased and foreign-capital-involved transactions slowed down. However, as China is one of the countries with the highest potential for long-term investment, overseas institutions remain positive about China’s property market.

In terms of property sub-markets, due to the decreased demand, large supply, and rising vacancy rate of office space, investors focused more on retail and residential properties.
“The growth in transaction volume in the residential market in 1Q09 may restore the confidence of institutional investors. However, as the market has not yet hit its bottom, the outlook of the investment market still depends on whether the Chinese economy can smoothly tide over the hard time as investors tend to remain cautious and adopt a wait-and-see attitude,” said Chan.
*A joint venture between Jones Lang LaSalle and Colonial First State Property Management, mainly engaged in retail store development and management service in Asia.