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News Release

Hong Kong and Macau

China’s Economic Stimulus Package Drives Domestic Demand

China’s stimulus policies designed to sustain domestic demand and boost economic growth have started to take effect in the first quarter of 2009, indicated by a rebound in residential sales, stable local retail consumption and resilient demand for Grade A office space from domestic companies, according to Jones Lang LaSalle.
Overall investment sentiment in China has picked up well as reflected by growth in all key indicators. Stock indices rebounded by 50% and 60% in Shanghai and Shenzhen respectively from their troughs in December 2008, and fixed asset investment (FAI) saw a 28% y-o-y growth in 1Q2009.  After falling some 10-12% y-o-y in 4Q2008, construction has also experienced some 10-15% y-o-y growth in recent months. Such growth has occurred despite a GDP of merely 6.1% in 1Q2009, compared with 10.1% a year ago, mainly attributable to contraction in the export sector when global demand shrunk under the financial tsunami.
“While Tier 1 cities are worse hit by the financial tsunami and are struggling for growth, Tier 2 cities are better sheltered from the downturn and maintained decent growth. As some of the Tier 2 cities continue to transform from industrial towards service-led economies, we expect to see them moving up the value chain and enjoying further economic growth in the future,” noted KK Fung, managing director for Jones Lang LaSalle Greater China.
Residential sales surge across Tier 1 and Tier 2 cities
Residential sales in the four major cities of Beijing, Shanghai, Guangzhou and Shenzhen shot up 70% y-o-y in the first four months of the year, largely driven by end-users and lower prices after developers’ price cuts earlier in the year.  The demand mainly stemmed from relaxation policies implemented by some local governments. Other triggers include a loosened mortgage market with easier financing.  While prices across Tier 1 cities rebounded 10-15% since February, those in Tier 2 cities have stabilised.  It is expected that price growth will continue to be led by Tier 1 cities because of lower risks, greater demand and less supply in this space as compared with Tier 2 and 3 cities.
Office market continues to slow with growing demand from domestic companies
The stimulus package, however, has had little impact on the Grade A office market which saw a significant slowdown after the financial crisis.  A contraction in MNC leasing demand, particularly in the banking and finance sector, led to rising vacancies across all Tier 1 and 2 cities with falling rentals.  Indeed, Tier 1 cities saw accelerating rental decline in 1Q2009.  Among these cities, Shanghai experienced the largest rental fall, down 22% since the financial crisis in October 2008, while Beijing decreased 12% over the same period. 
Although valuation-implied capital values have fallen on the back of rental decline, the sales market saw very few transactions and no notable trend in distressed sales.
“We expect that weaker demand, rising vacancies and abundant future supply will limit rental growth potential in 2009 and 2010 and the wide expectation gap between vendors and buyers is likely to leave the sales market very slow.  Nonetheless, the government’s green light for insurance companies to make direct real estate investment and the proposed REIT listings will create a genuine demand for stable-income commercial properties in the medium to long run,” said KK Fung.
Mass market continues to provide stable support to retail sector
The retail market has been relatively less affected than the office market since the financial crisis.  Although the retail sales growth momentum has slowed, it has recorded some 15% y-o-y growth recently.  While there is a notable slowdown in sales demand for discretionary and luxury items, mass market and necessity products are performing relatively well.  In terms of rental decline, prime retail rents fell by only about 10% in the past six months and in some Tier 2 cities, retail rents continued to edge up.  With the 2010 World Expo looming, Shanghai’s retail rents are holding up relatively strong amongst Tier 1 cities. The majority of Tier 2 cities, on the other hand, were largely unaffected for their better sheltering from the financial crisis and their growing incomes arising from continual urbanisation. 
“Looking ahead, local consumption will continue to drive China’s retail space demand, albeit at a slower pace.  Foreign retailers will continue to see China’s retail market as offering among one of the most potential globally but may hold a cautious approach towards rental bidding in the current market.  While the best located and best managed malls will continue to outperform, landlords of less established malls will need to prepare for more flexible leasing strategies in order to survive the competition,” commented KK Fung.
“The stimulus package seems to be more effective in driving growth in Tier 2 cities than in Tier 1 cities. Although the current situation is still challenging, both Tier 1 and Tier 2 cities will continue to thrive in the coming years due to each of their own reasons. Shanghai will continue to benefit from improved infrastructure and accessibility driven by the 2010 World Expo while Beijing will further capitalise on its position as the seat of government and as decision-maker with direct stimulus investment into infrastructure to boost the city’s role as a logistics hub in North East China. Guangzhou and Shenzhen, on the other hand, will continue to strengthen their positions as southern China’s commerce and logistics hubs and will benefit from the growing business tie between Hong Kong and the Pearl River Delta. Tier 2 cities such as Chengdu and Tianjin will enjoy further expansion as they climb up the value chain by gradually transforming their economies into more service-led,” concluded KK Fung.