China’s housing market struggles, commercial may be a bright spot

Commercial property is a bright spot in Chinese real estate, in contrast to the doom and gloom of the housing market.

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

Hong Kong-listed real estate group KWG Group Holdings said recently that rental income from offices and other commercial properties rose 6% in the first half, even as revenue from housing development and sales in China fell nearly 37% from a year ago. .

Likewise, property group CIFI Holdings had a 23% year-on-year decline in home sales in China in the first half, but reported a 69.5% increase in its revenue from property investments.

In July, Hong Kong’s Hang Lung Properties reported a slight lift in its first half, which deputy chairman Adriel Chan called a “pleasant surprise”. While the company reported lower revenue from malls and hotels due to pandemic shutdowns, prime office rents rose 16%.

“Office has done surprisingly well for us. It now accounts for about 20% of our revenue in mainland China. And it’s been very robust. I know 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 invests primarily 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 weak prospects for new leases .

Chinese commercial real estate 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 Lauressa Advisory partner Nicholas Spiro.

The commercial sector has not been spared the crisis of confidence that has swept over the housing market. While some investors sold assets to stay liquid, Spiro said the commercial sector generally has more supportive government and fiscal policies.

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

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

“And the conservative mindset of Chinese companies – which makes pandemic-induced changes to work patterns more problematic than in the US and UK – bodes well for the sector in the long term,” he said.

Apart from broader support policies, Chinese authorities also have more direct schemes to help landlords, such as reducing land use taxes in cities and providing subsidies to landlords to cover foregone rents.

As for tenants, global property investor Hines, despite the challenge of lockdowns and China’s zero-covid policy, sees increasing demand for retail and office space as companies see opportunities in a down market that leads to many open offices or leasing space .

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

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

Overall, the resilience of the Chinese commercial real estate sector lies in its ability to bounce back faster than its residential counterpart.

According to property consultancy CBRE’s latest China update, between the first and second quarters of this year – during China’s worst lockdown in Shanghai – new offices and rents fell by 56% and 75% respectively.

Rents fell across 18 markets followed by CBRE. The firm’s national rent index fell 0.5% quarter-on-quarter.

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

Logistics fared better with rentals increasing in the second quarter, but down on last year.

But unlike residential, the commercial sector is on the rise, especially after lockdowns ended and government incentives kicked in, CBRE said. CBRE also expects the commercial sector, excluding retail, to perform well for the rest of the year.

The recovery will come from demand for space from tenants in the finance, technology, media and telecommunications and life sciences sectors, said property adviser Cushman & Wakefield’s head of occupier research in greater China, Shaun Brodie.

“By 2022, the central and local governments in China have taken active measures to deal with the epidemic and effectively promote stable economic growth,” Brodie said.

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

Again, unlike the housing market, the recovery of trade is stronger in the commercial real estate market, as there are many players not affected by financing restrictions who still want to buy and sell assets, Benjamin Chow, head of the Asia analysis of real assets 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 buyers of commercial real estate year-to-date,” he said.

“Another group of buyers includes the companies that made a big splash last year and have still been relatively active in 2022.”