The Chinese residential market is in trouble, the commercial could be a positive point

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

Real estate analysts and developers said offices, warehouses and shopping malls are proving resilient and continue to generate steady rental revenues, albeit discounted due to weaker demand.

Hong Kong-listed real estate group KWG Group Holdings recently said that earnings from office and other commercial property rentals rose 6% in the first half of the year, although revenues from housing development and sales in China they are down by almost 37% compared to a year ago.

Likewise, real estate group CIFI Holdings reported a 23% year-over-year decline in home sales in China for the first half, but reported a 69.5% increase in real estate investment revenues.

Hong Kong’s Hang Lung Properties posted a small first-half earnings increase in July, which Vice President Adriel Chan called a “pleasant surprise.” While the company recorded lower revenue from shopping malls and hotels due to the pandemic lockdown, top-notch office rents increased by 16%.

“Office has done surprisingly well for us. It now accounts for around 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 keep looking at offices.” Chan told CNBC’s “Squawk Box Asia” in late July.

Hang Lung, which invests primarily in commercial real estate in mainland China, has seen occupancy rates for its office towers in Wuxi, Kunming and Wuhan continue to rise, while levels in Shenyang and Shanghai have held up amid weak prospects for new rentals.

Advantages for the commercial sector

Chinese commercial real estate investors and their tenants do not face the same difficulties as their residential counterparts, who are struggling with slower sales, as well as recessionary and debt pressures, said Nicholas Spiro, Lauressa Advisory real estate advisory partner.

The commercial sector was not spared by the crisis of confidence that hit the real estate market. While some investors have sold assets to remain liquid, Spiro said the commercial sector generally has more favorable government and tax policies.

While Beijing is trying to deflate the bubble in the residential market without collapsing the economy, it is prioritizing investments in infrastructure and the new economy, particularly to the benefit of the industrial property and logistics sector.

Nicola Spiro

partner, Laurenssa Advisory

“While Beijing is trying to deflate the bubble in the residential market without collapsing the economy, it is prioritizing investments in infrastructure and the new economy, particularly to the benefit of the industrial property and logistics sector,” Spiro said.

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

“And the conservative mindsets of Chinese companies – which make pandemic-induced changes to business models more problematic than the US and the UK – bode well for the industry in the long run,” he said.

In addition to broader support policies, the Chinese authorities also have more direct schemes to help landlords, such as lowering taxes on urban land use and providing landlord subsidies to cover renounced rents.

As for tenants, despite the blockade challenge and China’s Covid-zero policy, global real estate investor Hines sees a growing demand for retail and office space as businesses see opportunities in a falling market leading to the opening of many offices or renting spaces.

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

“For the office, we are seeing tenants trying to move to spaces and places that better suit their needs and to 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 CBRE’s latest Chinese real estate advisory update, between the first and second quarters of this year, during China’s worst lockdown in Shanghai, new office supplies and rents fell by 56% and 75, respectively. %.

Fixed asset investment data for the first five months of 2022 showed that real estate investments decreased more than in the first four months of the year. Pictured here May 16 is a development in the city of Huai’an in eastern China’s Jiangsu province.

CFOTO | Future publishing | Getty Images

Rents fell in 18 markets monitored by CBRE. The company’s national rental index fell 0.5% quarterly.

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

Logistics did better with rents hikes in the second quarter, but declined from last year.

Down but not out

But unlike housing, the commercial sector is picking up particularly after the end of lockdowns and the start of government incentives, CBRE said. CBRE also expects the commercial sector, with the exception of retail, to do well for the rest of the year.

The recovery will come from demand for space by tenants in the financial, technology, media, telecommunications and life sciences sectors, said Shaun Brodie, head of occupant research at Cushman & Wakefield in greater China.

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

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

Again, unlike the real estate market, the resumption of deals is stronger in the commercial real estate market as there are many players unaffected by the financial restraints who are still looking to buy and sell assets, Benjamin Chow, Head of Asset Research in Asia at MSCI.

“Domestic institutions are a good example: they have been the largest buyer group this year. Within this group, insurance operators, banks and financial groups have been among the largest buyers of commercial property since the beginning of the year.” , he has declared.

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

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