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Vacancies are rising in China’s most exclusive office buildings as businesses look to reduce rental expenses during the country’s disappointing economic recovery.
While cost-cutting by companies represents a sensible response to tougher times, it threatens to make things worse in China just as growing fears about the property sector have prompted global banks to scale back their forecasts for growth in Asia’s largest economy.
“Activity began to cool down again in the second quarter,” said Soho China, a Hong Kong-listed owner of office buildings in Beijing and Shanghai, as it reported a 93 per cent fall in first-half profits to Rmb13.61mn ($1.89mn). “Rents and occupancy rates will be under continuous pressure.”
More tenants in Shanghai’s Grade A offices terminated leases than signed them during the quarter ending in June, the first time this has happened since 2015, according to Savills, a British real estate services company, which identified 7,445 square metres of vacant space in such buildings.
Beijing experienced its third consecutive quarter of rising Grade A office vacancies, leaving 13,461 sq m unoccupied at the end of June, the highest figure since 2015, according to Savills.
This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.
Huang Libei, who owns a food and beverage importing business, said he moved his office out of Shanghai’s exclusive Xujiahui district in February after his landlord tried to raise his rent for the first time in six years. With subdued demand and a weaker renminbi hitting his business, he opted for a location several kilometres away that was 16 per cent cheaper, costing Rmb50,400 a month.
“Rental is one of the very few overheads that we can cut now,” Huang told Nikkei Asia.
CBRE, a real estate services and investment company headquartered in Dallas, US, said in an August 8 report that “rents in mainland China tier-1 cities are set to decline further amid continued subdued demand”. The call was noteworthy because CBRE in January has predicted “solid” demand for office space as the Chinese economy recovered following the relaxation of Covid-19 restrictions.
“Since China’s economic recovery is slower than expected, many occupiers are taking a wait-and-see approach before committing to new leases,” said Henry Chin, CBRE’s head of research in the Asia-Pacific region.
CBRE estimated that the value of office properties in China’s tier-1 cities dropped between 15 and 20 per cent since 2018.
The challenge for landlords is that business tenants in China are seeking to cut costs as the supply of office space grows. During the first seven months of the year, office building completions were up 22 per cent from 2022, reaching 11.64mn sq m at the end of July, the National Bureau of Statistics reported.
During the same time, the amount of office property sold fell 18.3 per cent and the proceeds from such transactions slid 20.2 per cent, the bureau said. More than 47.6mn sq m of office space remained unsold at the end of July, up 21.9 per cent from a year ago.
Ou Haijing, deputy chief executive of Hong Kong-listed Yuexiu Real Estate Investment Trust, said competition for office tenants was intensifying as new supply hit the markets. Yuexiu Reit responded by shortening leases in a bid to attract more business, Jiang Yongjin, the group’s investor relations director, told Nikkei Asia during the company’s earnings conference in Hong Kong in mid-August.
Nonetheless, its office rental income fell 4 per cent for the first half from a year earlier to Rmb612.3mn. It faced particularly tough conditions in Wuhan, where “market supplies are huge” and vacancy rates were high, according to Jiang. Yuexiu’s Wuhan Yuexiu Fortune Centre reported a 19.2 per cent decline in rental income from a year ago and an 8.4 percentage point drop in its occupancy rate to 61.6 per cent.
Among leading Chinese cities, Shenzhen and Guangzhou, hubs for high-tech and manufacturing companies, were doing relatively better, said James MacDonald, Shanghai-based head of China research for Savills. Landlords in those places had locked in more leases in advance, he said.
Meanwhile, foreign and domestic investors are keeping their distance from the office property sector. In the second quarter, total corporate investment in Chinese office space was $1.9bn, the lowest figure since the last quarter of 2018, according to MSCI Real Assets.
Of that amount, $1.7bn came from domestic investors and $200mn from other parts of the Asia-Pacific region. Excluding companies buying buildings for their own use, there have been no office transactions involving North American or European institutional investors in the past two years, MSCI said.
“Prospects for the sector have also dimmed alongside China’s weaker than expected GDP growth,” said Benjamin Chow, MSCI’s head of Asia real assets research. “Liquidity for the sector has diminished significantly, with the pull out of not just cross-border investors but even domestic as well.”
Chow said domestic investors in commercial real estate were focusing on logistics, life sciences and multifamily buildings, rather than office towers.
For the first half, China office investment amounted to $6.3bn, the lowest since the second half of 2018, MSCI said.
Overall commercial property deal volume, which captures transactions in office, industrial, retail, hotel, apartments and senior housing, fell 37 per cent from a year ago to $14.2bn in the first six months of the year, according to MSCI.
A version of this article was first published by Nikkei Asia on August 21. ©2023 Nikkei Inc. All rights reserved.
