Riding the real estate roller coaster

By Cao Qian  |   2009-1-14  |     NEWSPAPER EDITION

WHEN the city's real estate market finished 2007 with strong momentum, soaring capital values and high rents in almost all types of properties, few people, even the most experienced industry players, expected the wheels to come off so fast over the following year.

But in 2008, grade-A office rents were slashed by a double-digit rate amid oversupply while the luxury residential market remained subdued as demand from buyers and tenants wilted as the global economic crisis bit down.

For developers, landlords and investors, 2008 was a roller-coaster ride.

Office

Vacancy rates at the city's grade-A office buildings tripled in 2008 amid an oversupply. The overall vacancy rate jumped to 15.4 percent by the end of last year from about 5 percent at the end of 2007, according to Savills Property Services (Shanghai), a major international real estate service provider.

Last year, 837,000 square meters of grade-A office space, including 619,000 square meters in Pudong, came on to the local market, the biggest amount in Shanghai's history. However, only 366,000 square meters were occupied during the period, Savills statistics showed.

"Record supply coupled with sluggish demand will continue to push the vacancy rate above 20 percent in 2009, when another 754,000 square meters of space is scheduled to be available in Shanghai,'' said Albert Lau, managing director of Savills.

Rents began to decline in all office sectors from the third quarter of 2008. Grade-A buildings in Puxi were the only exception. However, rents for Puxi's premium buildings began to join the rest of the market in the last quarter, falling 12 percent, according to Jones Lang LaSalle, another world-leading real estate service provider.

While most landlords are now offering generous renewal packages, including longer rent-free periods, to retain tenants, some have adopted different strategies to lure occupants, such as more use of greenery and outside space.

Insiders expected office rents to continue to fall in 2009. Conservative estimates put the range between 5 and 15 percent. Pessimists called it 20 to 25 percent.

Retail

Retail properties remained the highlight of 2008, with rents rising and vacancies standing at low levels.

Retail sales across the world are on the decline, but many global retailers still view China as a significant growth engine over the coming years though many of them are becoming increasingly cautious about expansion plans.

In Shanghai, there were no major signs that retailers were fleeing the market and the overall vacancy stood at a low 6.5 percent by the end of the fourth quarter, Jones Lang LaSalle figures showed.

Average rentals for prime ground-floor space rose 3.1 percent from a quarter earlier as demand for quality space remained robust.

For 2009 when growth in total retail sales is expected to slow, retail rents will encounter some pressure. But the majority of industry insiders believed retail properties would outperform other sectors this year with rents continuing to grow, though at a slower pace.

New supply in prime locations scheduled to complete in 2009 will cause no dramatic decrease in rents. Properties in decentralized areas will face greater downward pressure.

Industrial

Logistics space for bonded and non-bonded uses had a mixed performance. While slowing demand for Chinese exports caused rents for bonded warehouses to decline, rentals for non-bonded spaces remained stable in the last quarter of 2008 due to a robust need for domestic distribution.

Logistics players are becoming more careful about their expansion plans as the market has been plagued by growing uncertainty. A total of more than 140,000 square meters of logistics space will be put on the Shanghai market this year.