Housing may be struggling in China, but there are green shoots in commercial real estate

Commercial real estate is a beacon of hope in Chinese real estate, in contrast to the pessimism in the residential housing market.

Property analysts and developers said offices, warehouses and business parks are proving resilient and continuing to generate stable rental income, albeit reduced due to weaker demand.

Hong Kong-listed real estate group KWG Group Holdings recently said rental income from offices and other commercial properties rose 6% in the first half of the year, even as income from property development and sales in China had fallen nearly 37% from a year ago. .

Similarly, real estate group CIFI Holdings reported a 23% year-on-year decline in China home sales in the first half, but reported a 69.5% increase in property investment income.

In July, Hong Kong’s Hang Lung Properties reported a slight increase in first-half profits, which Vice Chairman Adriel Chan called a “pleasant surprise.” As the company saw lower mall and hotel revenue due to pandemic closures, prime office rents jumped 16%.

“Office has been surprisingly successful for us. It now represents about 20% of our revenue in mainland China. And it has been very resilient. I know not all developers have had the same experience. And so yes, we would continue watching offices,” Chan told CNBC’s “Squawk Box Asia” in late July.

Hang Lung, which primarily invests in commercial property in mainland China, saw occupancy rates at its office towers in Wuxi, Kunming and Wuhan continue to rise, while levels in Shenyang and Shanghai held steady in a context of poor prospects for new rentals.

Benefits for the commercial sector

Chinese commercial real estate investors and their tenants don’t face the same challenges as their residential counterparts, who are struggling with slower sales as well as recessionary and debt pressures, said real estate advisory partner Nicholas Spiro. Laurassa Advisory.

The commercial sector has not been spared by the crisis of confidence that has swept through the housing market. While some investors sold assets to stay liquid, Spiro said the commercial sector generally had more supportive government and tax policies.

As Beijing seeks to deflate the housing market bubble without crushing the economy, it favors investments in infrastructure and the new economy, which particularly benefit the industrial and logistics real estate sector.

Nicholas Spiro

partner at Lauressa Advisory

“As Beijing seeks to deflate the housing market bubble without crushing the economy, it is prioritizing investment in infrastructure and the new economy, which particularly benefits the industrial and logistics real estate sector,” he said. Spiro.

He also sees room for growth in China’s commercial sector, with “huge opportunities for development in secondary cities”.

“And the conservative mindsets of Chinese companies – which make pandemic-induced changes in working patterns more problematic than in the US and UK – bode well for the sector in the long term,” said- he declared.

Along with broader support policies, Chinese authorities also have more direct programs to help landlords, such as reducing taxes on urban land use and giving landlords subsidies to cover canceled rents.

On the tenant side, despite the challenge of closures and China’s Covid-zero policy, global property investor Hines sees growing demand for retail and office space as businesses see opportunities in a declining market leading to numerous office openings or space rentals.

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“We are seeing retailers using the current market reset to experiment with new brand concepts and experiences,” said Claire Cormier Thielke, country manager for China at Hines, which has real estate investments in mainland China.

“For the office, we are seeing tenants looking to move towards spaces and locations better suited to their needs and modern, more collaborative work.”

All in all, the resilience of China’s commercial real estate sector lies in its ability to rebound faster than its residential counterpart.

According to the latest Chinese update from real estate consultancy CBRE, between the first and second quarters of this year – during China’s worst lockdown in Shanghai – new office supply and rentals fell by 56% and 75%, respectively.

Fixed asset investment data for the first five months of 2022 showed that real estate investment declined on a larger scale than in the first four months of the year. Pictured on May 16 is a development in the city of Huai’an in east China’s Jiangsu province.

CFOTO | Edition of the future | Getty Images

Rents fell in 18 markets tracked by CBRE. The National Enterprise Rent Index fell 0.5% quarter-on-quarter.

Retail leasing was also hit hard, with second-quarter rents falling 44% from the previous quarter and 87% from a year ago.

Logistics performed better with rents up in the second quarter, but down compared to last year.

Down but not out

But unlike housing, the commercial sector is rebounding, especially after shutdowns end and government incentives take effect, CBRE said. CBRE also expects the commercial sector, excluding retail, to do well for the rest of the year.

The recovery will come from demand for space from tenants in finance, technology, media, telecommunications and life sciences, said Shaun Brodie, head of occupier research at real estate consultancy Cushman & Wakefield in Greater China.

“Until 2022, central and local governments in China have taken active measures to deal with the epidemic and effectively promote stable economic growth,” Brodie said.

Commercial property sales and deal flow in China have also slowed, investment research firm MSCI said last month.

The logistics market is

Again, unlike the housing market, the recovery in transactions is stronger in the commercial real estate market as many players unaffected by the funding restrictions are still looking to buy and sell assets, Benjamin Chow said. , Head of Asia Real Estate Asset Research at MSCI.

“National institutions are a good example of this – they were the largest group of buyers this year. Within this group, insurance-backed players, banks and financial groups were among the biggest buyers of commercial real estate year-to-date,” he said.

“Another group of buyers includes companies, which caused a stir last year and were still relatively active in 2022.”