BMI View: Although we see Chinese economic growth slowing in the medium term, we are optimistic for the commercial property sector as a whole, as the maturing of the Chinese economy means that opportunities for new, premium developments remain plentiful. Reflecting this view, there is significant international interest in investing in Chinese commercial property.
We forecast a slowdown in Chinese economic growth, despite government stimulus measures, from 6.7% in 2015 and to under 6% by the end of our forecast period, in 2018. The government is treading a fine line between continuing with policies to stimulate investment with badly needed market reforms. The market is also being hit by a fall in residential real estate prices, with many predicting that the Chinese property bubble will burst. We do see prices continuing to fall, although in our view this will be more a correction than a crash, but it will undoubtedly have an impact on sentiment in the economy as a whole. However, in general we are optimistic regarding the commercial real estate sector, as demand remains strong and opportunities are plentiful.
Demand in the office sector is set to remain strong, driven particularly by the premium property segment and services-related industries such as finance and IT, with interest coming both from local and international firms. Overall the supply/demand dynamic will remain balanced as a result of a pipeline of new projects opening, particularly of grade A space.
We see significant opportunities arising in the retail real estate sub-sector. As China's economy moves towards domestic consumption, we believe that significant opportunities will arise in retail, especially towards the premium end of the market in the mass grocery retail and clothing sectors in particular. If the economic slowdown has a more marked impact on household spending than we expect the sector could suffer, but in general we are optimistic, and see household spending rising significantly over our forecast period, with a growth rate above 10%.
While the industrial real estate sub-sector will be affected by the slowdown in China's economic growth, we are optimistic, as a number of new trends will shift the balance of the market and create new opportunities. As China's economy develops, demand for will shift from traditional factory space to logistics and warehousing, while manufacturing and logistics operations will in general move up the value chain, meaning greater demand for grade A space. The government's emphasis on improving the freight transport system, and a number of logistics parks initiatives, should also boost demand and supply for premium space.
In the short term, the capital, Beijing, has the most buoyant outlook for rental rates. We are forecasting that rental rates in Beijing will grow, albeit by small amounts, in all three sub-sectors in 2016. The city is headquarters to a large number of Chinese firms, and has high consumer spending, indicating that demand will remain strong. Shanghai is in many ways China's powerhouse, and home to a large number of local and international firms. Again, we see demand remaining strong across all three sub-sectors in China's largest city. Shenzhen will continue to benefit from its status as an IT and technology hub, and its location near Hong Kong. We see the commercial real estate market in inland Wuhan improving over our forecast period, as more companies take advantage of the city's untapped potential and relatively cheaper rents, and as transport links improve. We give China a score of 72.5 out of 100 in our Q115 Risk/Reward Index for the commercial real estate sector. China is in second place, after Australia, in our table of 14 countries in the region. Its score is boosted by particularly high scores for industry risks (90 out of 100) and industry rewards (80 out of 100).
Key Trends And Developments
Retailer Walmart China is set to make its first foray into Chinese shopping mall development. Its' first mall, anchored by a Sam's Club outlet, is set to open in Zhuhai in 2016. The company is reportedly planning further shopping centre development in China.
The second phase of the Shanghai Waigaoqiao Logistics Park is due to be completed by the end of 2014. Most of the space in the park is already leased or has been custom built.
Government initiatives to improve freight transport links within China will boost the market for logistics and warehouse real estate.
The country's first real estate investment trust-type vehicle listed on the Shenzhen Stock Exchange in May 2014. The CITIC Qihang Specific Asset Management Plan has two assets, office buildings in Beijing and Shenzhen.
Key BMI Forecasts
We see no change in office rental rates in China in the four cities we cover in 2015, although we do see a rise, of 2-3%, in Beijing in 2016.
In the retail sub-sector we see no change in rents in 2015. There is set to be a 2-3% rise in Beijing in 2016, however, driven by strong consumer spending and increasing interest from foreign retailers, particularly in the mass grocery retail sphere.
We believe that rental rates for industrial real estate will not change in 2015; however, we do see scope for a small rise in Beijing, of 1-2%, in 2016.