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Space goes abegging in overbuilt offices

By Jiang Xufeng, Shi Qingwei and Wang Zhi | May 5, 2009, Tuesday | Print Edition

ALTHOUGH Chinese housing sales have been picking up, boosted by pent-up demand and falling prices, there have been few signs of life in the non-residential property market.

National Bureau of Statistics figures for the first quarter showed that private-sector housing sales volume increased 8.2 percent in 70 large and medium-sized cities, with a 1.3-percent price drop per square meter in March from a year earlier.

In the commercial property market, both sales and prices were up, because people were buying properties for investment.

Yet rents were down and vacancies were up, indicating that a rebound in demand was some way off.

China's economy expanded by 6.1 percent year on year in the first quarter, the lowest growth rate in 10 years, reflecting the domestic impact of the global downturn.

A report by DTZ, a British-based real estate advisory and consultancy firm, showed that leasing demand for office space in Beijing had begun to dramatically weaken in the first quarter as world economic conditions deteriorated.

The average first-quarter office building vacancy rate in the capital city rose 5.72 percentage points from the fourth quarter of 2008 to 18.97 percent, DTZ figures show.

At the same time, average monthly rents for Beijing office buildings fell 9.26 percent quarter on quarter to 207 yuan (US$30.40) per square meter.

Richard Wang, director of DTZ's north China consultancy department, said over-supply was a key problem facing the Beijing office property sector.

He said that 1.3 million square meters of new supply would come into the market in Beijing this year, mostly in the central business district, where many multinational companies were based.

That's more than double the 603,000 square meters of new office building space that came into Beijing's market in 2008.

Beijing is not the only city with an office space overhang. DTZ figures showed that office vacancies hit 11.86 percent at the end of March, up from 9.29 percent a quarter earlier, in Shenyang, capital of Liaoning Province.

Office building owners in parts of southern China were even worse off than those in Shenyang in the first quarter.

Jones Lang Lasalle reported that the office vacancy rate in Guangzhou, capital of Guangdong Province, was 21.2 percent, unchanged from the fourth quarter of 2008, while average rents fell 8.8 percent.

Guangdong is famous for its toy, bag, suitcase, shoe and home appliance exports. But the province's economy expanded 5.8 percent year on year during the first quarter, 0.3 percentage point below the national average, slowed by the export slump.

The main problem for the residential property market was that high prices in many big cities like Shanghai, Beijing and Guangzhou were not affordable to residents.

However, the main problem for commercial property was the weakening willingness to invest by domestic entrepreneurs.

Wang said whether a strong revival in the rental market would develop in early 2010 would depend heavily upon global and domestic expectations for output growth over the next two years.

Spurred by the State Council (cabinet)'s goal, announced in March, to build Shanghai into a global financial and shipping hub by 2020, office building sales in the city picked up in the first quarter.

Analysts said that the ambitious plan gave investors confidence in the city's long-term development prospects.

Hard-hit retailers

Retailers have felt the brunt of dampened consumer sentiment and sales revenues have begun to decline, putting downward pressure on retail property rents.

China's first-quarter retail sales grew 15 percent year on year to 2.94 trillion yuan and those in Beijing rose 12.6 percent to 122.1 billion yuan, but most of those gains represented higher unit volume achieved by aggressive discounting by large supermarkets.

Those conditions didn't translate into gains by luxury brands or small community shops in many cities, and these retailers were unwilling to open new outlets or expand existing ones.

Jones Lang Lasalle said the daily average retail property rent in Shanghai fell 1.4 percent during the first quarter from the fourth, to 47 yuan per square meter. That was the first quarter-on-quarter drop since 1999.

The global financial crisis and economic slowdown were having a divergent impact on different shopping malls.

Well-established ones in locations such as Wangfujing and Xidan in Beijing were less affected, as they had a steady stream of customers. New malls, however, felt a greater pinch from the slowdown.

To boost their leasing, one option for developers was to adjust their base tenant focus from high-end luxury retailers to middle-market retailers to ensure a reasonable level of occupancy, Wang said.

"A second option is to reduce effective rents through longer rent-free periods and rental concessions," he said.

Despite the current weak retail climate, sales of retail property nationwide rose to 6.133 million square meters in the first quarter from 5.688 million square meters the fourth quarter last year.

In some cities with untapped consumption potential, foreign and domestic developers were continuing to invest in building more retail properties.

(The authors are Xinhua writers.)

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