China’s residential market is struggling, commercial may be bright spot

Hang Lung Properties posted 1% increase in underlying earnings despite zero Covid policy: Vice Chairman

Commercial real estate is a bright spot in China’s real estate market, in contrast to the decline and gloom of the residential real estate market.

Real estate analysts and developers said offices, warehouses and business parks are proving resilient and continue to generate steady rental income – albeit discounted due to weaker demand.

Hong Kong-listed real estate group KWG Group Holdings recently announced that revenue from office and other commercial property rentals rose 6% in the first half of the year, even as revenue from residential property development and sales in China rose nearly year-on-year 37% have fallen.

Likewise, real estate group CIFI Holdings saw home sales in China fall 23% year-on-year in the first half, but reported a 69.5% rise in income from real estate investments.

In July, Hong Kong’s Hang Lung Properties reported a slight increase in its first-half earnings, which Vice Chairman Adriel Chan described as a “pleasant surprise”. While the company reported lower revenue from malls and hotels due to pandemic lockdowns, prime office rents rose 16%.

“Office has done surprisingly well for us. It now accounts for about 20% of our sales in mainland China. And it was very resilient. I know not all developers have had the same experiences. And yes, we would keep looking at the offices,” Chan told CNBC’s “Squawk Box Asia” in late July.

Hang Lung, which invests primarily in commercial real estate in mainland China, saw occupancy rates at its office towers in Wuxi, Kunming and Wuhan rise further, while levels in Shenyang and Shanghai held up amid weak prospects for new leases.

Advantages for the commercial sector

Chinese commercial real estate investors and their tenants are not facing the same difficulties as their residential counterparts, who are grappling with slower sales and recession and debt pressures, said Nicholas Spiro, partner at real estate consultancy Lauressa Advisory.

The commercial sector has not been spared from the crisis of confidence that has hit the housing market. While some investors were selling assets to remain liquid, Spiro said the commercial sector generally has more supportive government and tax policies.

As Beijing seeks to defuse the housing bubble without crashing the economy, it is prioritizing investments in infrastructure and the new economy, which will particularly benefit the industrial and logistics real estate sectors.

Nicholas Spiro

Partners, Lauressa Advisory

“As Beijing seeks to deflate the housing bubble without crashing the economy, it is prioritizing investments in infrastructure and the new economy, which will particularly benefit the industrial and logistics real estate sectors,” Spiro said.

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

“And the conservative mindset of Chinese companies — making pandemic-related changes in work patterns more problematic than in the US and UK — bodes well for the sector in the long-term,” he said.

Aside from broader supportive measures, the Chinese authorities also have more direct programs to help landlords, such as B. Lowering city land use taxes and providing subsidies to landlords to cover rent forgiven.

As for tenants, despite challenges from lockdowns and China’s Covid-zero policy, global real estate investor Hines sees demand for retail and office space rising as companies see opportunities in a declining market leading to many office openings or leases .

Real estate in China will become a low-margin sector in 5-10 years, says analyst

“We’re seeing retailers taking advantage of the current market shift to experiment with new brand concepts and experiences,” said Claire Cormier Thielke, country director for China at Hines, which has real estate investments in mainland China.

“For the office, we’re seeing tenants looking for an upgrade to spaces and locations that better suit their needs and modern, more collaborative work.”

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

Between the first and second quarters of this year – during China’s worst lockdown in Shanghai – new office space and rents fell by 56% and 75%, respectively, according to the latest China update from real estate consultancy CBRE.

Fixed investment data for the first five months of 2022 showed that real estate investment fell more sharply than in the first four months of the year. Pictured here on May 16 is a development in the city of Huai’an, east China’s Jiangsu province.

CFOTO | Future Publishing | Getty Images

Rents fell in 18 markets tracked by CBRE. The company’s national rent index fell 0.5% qoq.

Retail leasing was also hit hard, with rents falling 44% sequentially and 87% year-on-year in the second quarter.

Logistics fared better as rents increased in the second quarter but declined year-on-year.

Down but not out

But unlike residential construction, the commercial sector is recovering, particularly after lockdowns end and government stimulus kicks in, CBRE said. CBRE also expects the commerce sector, excluding retail, to do well for the remainder of the year.

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

“By 2022, central and local governments in China have taken active measures to deal with the epidemic and effectively promote steady 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 “very strong” across Asia: Colliers

Unlike the residential real estate market, the commercial real estate market is seeing a stronger deal deal recovery as many players unaffected by funding constraints are still looking to buy and sell assets, Benjamin Chow, Head of Asia Real Assets Research at MSCI.

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

“Another group of buyers are the corporates, which caused a sensation last year and are still relatively active in 2022.”