Commercial property is a bright spot in Chinese real estate, in contrast with the doom and gloom of the residential housing market.
Property analysts and developers said offices, warehouses and business parks are proving resilient, and continuing to turn over steady rental revenue — albeit discounted due to softer demand.
Hong Kong-listed property group KWG Group Holdings recently said earnings from rents from offices and other commercial property rose 6% in the first half of the year, even though revenue from housing development and sales in China had fallen nearly 37% from a year ago.
Likewise, property group CIFI Holdings posted a 23% year-on-year drop in home sales in China for the first half, but reported a 69.5% lift in its property investment revenue.
In July, Hong Kong’s Hang Lung Properties reported a small lift in its first half profits, which Vice Chairman Adriel Chan called a “pleasant surprise.” While the company reported lower revenue from malls and hotels due to pandemic lockdowns, prime office rents surged 16%.
“Office has done surprisingly well for us. It now accounts for about 20% of our mainland China revenue. And it’s been very resilient. I know that not all developers have had the same experience. And so yes, we would continue to look at offices,” Chan told CNBC’s “Squawk Box Asia” in late July.
Hang Lung, which primarily invests in commercial property in mainland China, saw occupancy rates at its office towers in Wuxi, Kunming, and Wuhan continue to rise, while levels in Shenyang and Shanghai held up amid dim prospects of new rentals.
Advantages for commercial sector
Chinese commercial property investors and their tenants do not face the same difficulties as their residential counterparts, which are struggling with slower sales as well as recessionary and debt pressures, said real estate advisory Lauressa Advisory partner Nicholas Spiro.
The commercial sector has not been spared the crisis of confidence that has swept across the housing market. While some investors sold assets to stay liquid, Spiro said the commercial sector generally has more supportive government and fiscal policies.
While Beijing is seeking to deflate the bubble in the residential market without crashing the economy, it is prioritizing investment in infrastructure and the new economy, which benefits the industrial and logistics property sector in particular.Nicholas Spiropartner, Lauressa Advisory
“While Beijing is seeking to deflate the bubble in the residential market without crashing the economy, it is prioritizing investment in infrastructure and the new economy, which benefits the industrial and logistics property sector in particular,” Spiro said.
He also sees room for growth in China’s commercial sector, with “huge scope for further development in secondary cities.”
“And Chinese companies’ conservative mindsets — which make pandemic-induced changes to working patterns more problematic than in the U.S. and U.K. — augur well for the sector in the long term,” he said.
Aside from wider supportive policies, Chinese authorities also have more direct schemes to help landlords, such as reducing urban land use taxes and providing subsidies to landlords to cover waived rents.
As 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 businesses see opportunities in a down market leading to many opening offices or leasing space.
“We are seeing retailers use the current market reset to experiment with new brand concepts and experiences,” said Claire Cormier Thielke, China country head at Hines which has property investments in mainland China.
“For the office, we’re seeing tenants looking to upgrade to spaces and locations better suited to their needs and modern, more collaborative work.”
All in all, the Chinese commercial property sector’s resilience lies in its ability to rebound faster than its residential counterpart.
According to real estate advisory CBRE’s latest China update, between the first and second quarters of this year — during China’s worst lockdown in Shanghai — new office supply and rentals fell 56% and 75%, respectively.
Rents declined across 18 markets tracked by CBRE. The firm’s national rental index fell 0.5% quarter-on-quarter.
Retail leasing was also hit hard, with rentals in the second quarter plunging 44% from the previous quarter and 87% from a year ago.
Logistics did better with rentals lifting over the second quarter, but were down compared with last year.
Down but not out
But unlike housing, the commercial sector is rebounding particularly after lockdowns ended and government incentives kicked in, CBRE said. CBRE also anticipates the commercial sector, except 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 and telecom and life sciences sectors, property advisory Cushman & Wakefield’s head of occupier research in greater China Shaun Brodie said.
“Into 2022, the 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.
Again, unlike the housing market, deal recovery is stronger in the commercial property market as there are many players not affected by financing restrictions 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 biggest buyer group this year. Within this group, insurance-backed players, banks and financial groups were among the biggest purchasers of commercial real estate year to date,” he said.
“Another buyer group comprises the corporates, which made a big splash last year, and have still been relatively active in 2022.”