Commercial real estate is a bright spot in Chinese real estate, in contrast to the doom and gloom of the residential housing market.
Real estate analysts and developers said offices, warehouses and commercial complexes have proven resilient, continuing to generate steady rental income – albeit reduced due to weak demand.
Hong Kong listed real estate group KWG Holding Group He said recently that rental profits from offices and other commercial properties rose 6% in the first half of the year, even though home development and sales revenue in China was down nearly 37% from a year ago.
Likewise, property group CIFI Collectibles It recorded a 23% year-over-year decline in home sales in China for the first half, but a 69.5% rise in real estate investment returns.
In July, Hong Kong Hang Lung Features It reported a small increase in first-half earnings, which Vice Chairman Adriel Chan called a “pleasant surprise.” While the company recorded a decline in revenue from malls and hotels due to the pandemic shutdown, rents for prime offices were up 16%.
“Office has done surprisingly well for us. It now accounts for about 20% of our revenue from mainland China. And it has been very resilient. I know that not all developers have had the same experience. So yes, we will continue to look at “Squawk Box Asia” to CNBC in late July.
Hang Lung, which invests primarily in commercial real estate in mainland China, saw occupancy rates rise in its office towers in Wuxi, Kunming and Wuhan, while levels continued in Shenyang and Shanghai amid bleak prospects for new rents.
Nicholas Spiro, real estate advisory partner, Nicholas Spiro, said Chinese commercial property investors and their tenants are not facing the same difficulties as their residential counterparts, who are suffering from slowing sales as well as recession and debt pressures.
The commercial sector was not spared from the crisis of confidence that swept the housing market. While some investors sold assets to maintain liquidity, Spiro said the commercial sector has more supportive government and fiscal policies.
“While Beijing seeks to de-bunk the housing market without collapsing the economy, it is prioritizing investment in infrastructure and the new economy, which benefits the industrial real estate and logistics sector in particular,” Spiro said.
He also sees room for growth in the Chinese commercial sector, with “wide scope for further development in secondary cities”.
“The conservative mindsets of Chinese companies – which make pandemic-induced changes in business patterns more problematic than in the US and UK – bode well for the sector in the long run,” he said.
Aside from broader supportive policies, the Chinese authorities also have more direct schemes in place to help landlords, such as lowering urban land use taxes and providing subsidies to landlords to cover forgoing rents.
For tenants, despite the challenge of lockdowns and China’s Covid-zero policy, global real estate investor Hines sees rising demand for retail and office space as companies see opportunities in a bear market leading to many open offices or rental spaces.
“We’re seeing retailers use existing market reset to experiment with new brand concepts and experiences,” said Claire Cormier-Thelk, president of Hines China, which has real estate investments in mainland China.
“For the office, we see tenants looking to upgrade to spaces and locations best suited to their needs and more collaborative modern work.”
Overall, the resilience of the Chinese commercial real estate sector lies in its ability to recover faster than its residential counterpart.
According to the latest update from CBRE on real estate advisory, Between the first and second quarters of this year – during China’s worst shutdown in Shanghai – supply and new office rents fell 56% and 75%, respectively.
Fixed asset investment data for the first five months of 2022 showed a decline in real estate investment on a larger scale than during the first four months of the year. Pictured here on May 16, a development in Huai’an City, east China’s Jiangsu Province.
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Rents fell in 18 markets tracked by CBRE. The company’s national rent index fell 0.5% on a quarterly basis.
Retail rental was also hit hard, with rents in the second quarter down 44% from the previous quarter and 87% from a year ago.
Logistics performed better as rents increased during the second quarter, but decreased compared to last year.
But unlike the housing sector, the commercial sector is particularly picking up after the lockdowns are over and government incentives kick in, 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 the financial, technology, media, communications and life sciences sectors, said Cushman & Wakefield’s head of property research, head of occupier research in Greater China, Shaun Brody.
“In 2022, China’s central and local governments have taken effective measures to deal with the epidemic and effectively promote steady economic growth,” Prodi said.
Investment research firm MSCI said last month that commercial property sales and deal flow in China had also slowed.
Again, unlike in the housing market, deal recovery is stronger in the commercial real estate market where there are still many players unaffected by funding constraints looking to buy and sell assets, said Benjamin Chao, head of real asset research in Asia at MSCI.
“Local institutions are a good example – they were the largest buyer group this year. Within this group, players backed by insurance, banks and financial groups have been among the largest buyers of commercial property since the beginning of the year so far,” he said.
“Another buyer group consists of companies, which were very successful last year, and are still relatively active in 2022.”