Industry Outlook Real Estate Shanghai Office (China)

Transcription

1 Real Estate Office (China) Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 21 September 216 Overall Outlook 1) Solid demand from domestic enterprises with additional opportunities likely from state-owned enterprise (SOE) consolidation Demand for office space in core areas in is still on the rise, driven by domestic financial services, professional services and IT-related firms, benefiting from the free trade zone Additional opportunities might come from SOE consolidation, as some shipping and financial SOEs may move their headquarters from to after consolidation (such as COSCO) 2) Rental and capital value outlook in core areas remains bright in the near- and mid-term New supply (core areas) is expected to ramp up in 216 and 217, concentrating in Pudong But 66% and 53% of the new 216 and 217 supply, respectively, in Pudong was either sold for self-occupation or pre-leased by the end of the 216 first quarter, which should have limited impact on rental growth Annual new supply in core areas of Puxi in 216 and 217 is roughly on par with average annual demand over the past ten years Overall, new supply in core areas is very limited in 218 to 22 As such, we expect 5-6% per annum growth in both rental and capital value for core areas in 216 to 22 3) Decentralised areas likely to face headwinds, but Pudong should fare better than Puxi Solid rental growth in core areas also led rental growth in decentralised areas in 215 and the 216 first quarter, though at a slower pace Looking forward, decentralised areas will face headwinds due to high supply ahead, which will lead to flattish rental growth and a high vacancy rate (above 17%) Yet, rental growth in Pudong should outpace that in Puxi, as a large proportion of new supply is in Puxi Key Risks: 1) Faster-than-expected deterioration in the domestic economy and external shocks The rental rate witnessed a decline in 28 and 29 as the domestic economy was affected by the global financial tsunami Capital value hiccupped in 28, but regained growth in 29 2) Faster-than-expected depreciation in the Chinese yuan Foreign capital may seek to exit due to downward pressure on the yuan exchange rate Our analysis shows that non-domestic landlords (including from Hong Kong, Macau, and Taiwan) own 54% of the prime office space completed during the past 15 years and 62% of the potential supply from 216 to 22 Strong demand to absorb supply peak in 216 and 217 Based on the current development plan, 879, square metres of new grade A offices in CBD areas are expected to be completed in 216, more than double the level in 215, as compared to the annual absorption of 442, square metres in 211 to 215 New prime office supply in 216 comes from the Little Lujiazui, Zhuyuan, and Changning areas However, we expect the vacancy rate to edge up marginally as 66% and 53% of the new 216 and 217 office supply, respectively, in Pudong has already been absorbed, driven by strong demand from local financial and IT-related companies, multinational retailers, and professional services firms Cost-sensitive companies such as multinational manufacturers are looking to relocate from core to decentralised areas However, due to ample supply in the decentralised market, the vacancy rate will likely stay high in those areas Page 1

2 2Q4 21Q4 22Q4 23Q4 24Q4 25Q4 26Q4 27Q4 28Q4 29Q4 21Q4 211Q4 212Q4 213Q4 214Q4 215Q4 216Q4 217Q4 218Q4 219Q4 22Q F 217F 218F 219F 22F Real Estate Office (China) Supply to shrink in 218 to 22 There are only 537, square metres of prime office space scheduled to be completed in the CBD areas in 218 to 22 We expect mid-term demand and supply dynamics to improve further, as annual absorption averaged 442, square metres in the core areas in 211 to 215, against annual average supply of 426, square metres in 216 to 22This will likely lead to lower vacancy in the CBD market ahead Vacancies in the decentralised market will likely stay high as more than 2 million square metres of office space will come onto the market from 218 to 22 Supply-demand dynamics of prime office space sm % 1 Supply hike in 216 1, 35 and 217 will likely 9 3 push up vacancy rate 8 temporarily Vacancy rate to come 5 down as supply 4 15 shrinks from onward New supply (LHS) Net take-up (LHS) Vacancy (RHS) Majority of pipeline supply in Pudong has either been sold for self-occupation or pre-leased According to JLL, the vacancy rate of prime office space in core areas climbed up to 5% in the second quarter, after two offices were completed in the Zhuyuan area Peer-to-peer (P2P) companies are downsizing after the government imposed stricter regulations on the P2P sector while multinational manufacturers are relocating to decentralised areas All these will likely push up the vacancy rate temporarily to 74% by end-216 Yet, leasing momentum is expected to stay strong and will bring the vacancy rate back to below 3% in 219 and 22 Little Lujiazui remains the tightest market, with relief in the short-term after the delivery of Tower As of the first half of this year, 55% of office space at Tower has been pre-leased by law firms The Zhuyuan and Changning areas will likely see a ramp-up in vacancy rates due to ample supply in the coming quarters Vacancy rate of submarket 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 1 Vacancy rate in Pudong will remain tight, but Zhuyuan will likely see its vacancy rate increase due to ample supply in the coming quarters 2 Vacancy rate in Puxi CBD to climb up, especially in Changning areas CBD overall CBD Pudong CBD Puxi Decentralised 3 Vacancy rate in decentralised market to stay high Page 2

3 2Q4 21Q4 22Q4 23Q4 24Q4 25Q4 26Q4 27Q4 28Q4 29Q4 21Q4 211Q4 212Q4 213Q4 214Q4 215Q4 216Q4 217Q4 218Q4 219Q4 22Q4 Real Estate Office (China) Historical annual net absorption and breakdown of 215 demand 'sm 1,6 1,4 1,2 1, 8 6 Puxi noncore 4% Pudong core 8% Pudong noncore 25% 1 Office demand hit a new high in Annual net absorption Puxi core 27% Rental growth to remain firm Net effective rental rates in Pudong and Puxi grew 96% and 92% on-year, respectively, in 215 and 9% and 1% on-quarter, respectively, in the second quarter of this year We expect rental growth to moderate to 5-6% in each year from 216 to 22 Rental growth is expected to slow down in Puxi and stay relatively flat in decentralised areas, given rising supply Rental/capital value index 1997Q4=1 1 Rental growth to 3 continue Capital value growth to see the same pattern as rental growth 1 5 Rental value index Capital value index Page 3

4 2Q4 21Q4 22Q4 23Q4 24Q4 25Q4 26Q4 27Q4 28Q4 29Q4 21Q4 211Q4 212Q4 213Q4 214Q4 215Q4 216Q4 217Q4 218Q4 219Q4 22Q4 2Q4 21Q4 22Q4 23Q4 24Q4 25Q4 26Q4 27Q4 28Q4 29Q4 21Q4 211Q4 212Q4 213Q4 214Q4 215Q4 216Q4 217Q4 218Q4 219Q4 22Q4 Real Estate Office (China) Net effective rental of submarket, based on gross floor area (GFA) Rmb/sm/day Pudong continues to lead rental growth 2 Puxi s rental growth to moderate 3 Decentralised market to see flat rental rate in 216/217 CBD overall CBD Pudong CBD Puxi Decentralised Robust rental growth to support gain in capital value s prime office assets remain attractive to international investors, due to higher yields relative to other global markets and the expectation of further price rises as a result of loosening monetary policy and interest rate cuts ahead Domestic investors are also positive on rental growth prospects in and are looking for en-bloc investment opportunities Developers such as Sino-Ocean Land have also been buying office buildings in lately Therefore, we expect en-bloc investments to remain active in and to drive up capital value The average price is expected to grow 77% in 216, mainly driven by Pudong Capital value of submarket, based on GFA Rmb/sm/day 1 Robust rental growth 12, to support growth in capital value 1, 8, 6, 4, 2, CBD overall CBD Pudong CBD Puxi Decentralised remains attractive to international investors Foreign capital may seek to exit due to downward pressure on the yuan exchange rate Our analysis shows that Hong Kong/Macau/Taiwan and foreign landlords respectively own 34% and 2% of prime office space completed during the past 15 years From 216 to 22, Hong Kong/Macau/Taiwan and foreign developers/investors will account for 47% and 15%, respectively, of the potential supply We believe domestic landlords will still treasure their assets in Tier-1 cities, particularly in, as rental growth prospects look more solid there, especially amid an interest rate-cut cycle Hence, asset offload pressure (due to yuan depreciation) may not be so high Page 4

5 Real Estate Office (China) GFA breakdown by ownership versus (estimated) E-22E Foreign 2% Domestic 46% Foreign 15% Domestic 38% 1 Rental yield and rental growth prospects remain solid in 2 More office buildings will be developed by Hong Kong/foreign owners in the coming five years HK, Macau, Taiwan 34% HK, Macau, Taiwan 47% Key Industry Trends Domestic companies will continue to dominate the leasing market Assisted by technology and encouraged by the government, there have been a rising number of new companies in the internet and finance sectors Leading companies in the internet and finance sectors are creating jobs within their own businesses, which require more office space in key cities like and, due to geographical proximity to regulators and customers Small- and micro-sized enterprises associated with those top companies are also adding new jobs is now fostering the big data industry The Data Exchange, which allows data transaction via authorised channels, opened on April This may attract related companies and organisations, enhancing the development of s tech sector Domestic companies will dominate the core market sm 1 Annual demand/net 6 absorption in 215 was more than double 5 the level in Proportion of domestic demand has increased from 35% in 212 to 2 59% in Domestic Foreign Page 5

6 Real Estate Office (China) Location remains a key factor, but new technology and facilities also matter Prime location with convenient transportation access remains a key factor for offices to attract and retain tenants In the view of younger employees, an office is not only a place to work, but also a place to entertain and socialise Employers may use the workplace to improve employee satisfaction The chronic air pollution in should give prime offices with air purification systems a competitive advantage Co-working space operators are rushing into, but this might not affect demand and supply dynamics as these spaces are converted from existing office buildings The government's support for entrepreneurship is aimed at encouraging the new economy and reliance on the economic structure, which has fostered an increasing number of start-ups As a result, co-working spaces have emerged in and to attract those start-ups Co-working spaces also attract independent contractors and freelance professionals, as co-working offices offer business synergy, access to resources and financial support, and incubator-related services We have seen a number of co-working operators rushing into the market American WeWork opened its first Asia centre in in late-june and plans to open two more centres in by year end Co-working operators emerge in Operator Business centres People Squared 1 Founder 7 SOHO 3Q 6 Anken Green 3 YR Work 3 We+ 2 Dutch Design 1 Yulink 1 Agora Space 1 Lohaus 1 Vanke ViP 1 WeWork 1 MOffice 1 1 Co-working businesses emerged in early WeWork is expected to launch its first location in June 3 Quite a few players are offering co-working spaces in Source: DTZ, Savills, DBS Bank Page 6

7 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16F 1Q17F 3Q17F Real Estate Office (China) Risks & Regulations Valued-added tax reform likely to benefit office landlords and support sales of offices Starting from May 1 216, China officially replaced business tax (BT, 565% on revenue) with value-added tax (VAT, 11% on a net basis outputs less inputs, or 54% on revenue under simplified method during transition period) Based on our calculation, both landlords and tenants will benefit from this VAT reform Landlords could also benefit from lower property tax after VAT reform Additionally, a company which purchases an office and categorises it as a fixed asset can claim input VAT credit, which will likely boost buying demand for offices VAT reform s impact T ax T ax rate T ax base T ax base Note Before V A T reform A fter V A T reform Business/sale tax 565% Gross revenue nil VAT reform's impact on retail and office are essentially the same, unless retail landlord engages in self-operated retail business VAT 11% nil Net revenue - deductable items (energy costs, maintenance cost; and land/construction costs for new office) New office (competed after May1, 216) can choose to use 54% under simplified method three years after completion 54% nil Net revenue Effective tax rate lowered to 51% of gross revenue Property tax 12% Gross revenue Net revenue Effective tax rate lowered to 113% of gross revenue 84% Original costs Original costs No change, but only for those old projects with low original costs Source: DBS Bank Yuan depreciation: Interest rate cut could help offset the risk Continued yuan depreciation and, in turn, devaluation of yuan assets may discourage foreign investments in this sector There is a risk of offloading of yuan assets and capital outflow However, as addressed above, we believe Tier-1 assets are still valuable for both domestic and foreign investors According to CBRE s latest survey on investor intentions, remains a key gateway city for investors We expect light transactions in the office market In the event of a selloff, domestic investors (including insurance companies) will still be keen on acquiring high-quality assets They are likely to lend support to the capital value of retail assets Further yuan depreciation is expected RMB to US$ Yuan is expected to devalue further from current levels Source: Bloomberg Finance LP, DBS Bank Page 7

8 Munich Sydney San Francisco Singapore LA (west) Tokyo New York Paris HongKong London Average HongKong Singapore Sydney Brisbane Tokyo Osaka Seoul Real Estate Office (China) Most attractive city in Asia Pacific (cross-border only), CBRE survey 25% 2% 15% 1% 5% % 1 remains one of the high interestgenerating regional gateway cities 2 13% of investors (cross-border only) intend to invest in in 216, down from 14% in Source: CBRE, DBS Bank Office rental yield comparison, risk premium, mid-216 5% 4% 3% 1 Effective yield in remains one of the highest among global gateway cities 2% 1% % Effective yield Effective risk premium Source: Savills, DBS Bank Page 8

9 Guangzhou Shenzhen Tianjin Chongqing Hangzhou Wuhan Real Estate Office (China) Appendix tertiary GDP growth versus overall GDP growth Tertiary GDP level and growth for key cities, 215 3% 25% 2% 15% 1% 5% Rmb bn % 2, 1,8 1,6 1,4 1,2 1, % 14% 12% 1% 8% 6% 4% 2% % % tertiary GDP tertiary (LHS) Growth Real estate investment (office), versus New GFA starts (office), versus Rmb bn Page 9

10 Real Estate Office (China) Planned unit development (office), versus GFA completion (office), versus GFA sold (office), versus GFA leased (office), versus Page 1

11 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Real Estate Office (China) GFA vacant (including all office space), versus Purchasing managers indices Planned unit development (office) quarterly, versus New GFA starts (office) quarterly, versus Page 11

12 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 Real Estate Office (China) GFA sold (office) quarterly, versus GFA completion (office) quarterly, versus Our In-House Expert Ken HE Liang ken_he@hkdbsvickerscom Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been produced prior to or subsequent to its publication Please refer to the links below for the latest specific equity research reports published on below-mentioned companies and the accompanying disclaimer/disclosure of DBS interest in the companies mentioned in the respective reports Page 12

13 Real Estate Office (China) GENERAL DISCLOSURE/DISCLAIMER The information herein is published by DBS Bank Ltd (the Company ) It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose Opinions expressed are subject to change without notice Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation Australia This report is being distributed in Australia by DBS Bank Ltd ( DBS ) or DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 21 ( CA ) in respect of financial services provided to the recipients Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws Distribution of this report is intended only for wholesale investors within the meaning of the CA Hong Kong Indonesia Malaysia This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s) This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder) This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR") Recipients of this report, received from ADBSR are to contact the undersigned at in respect of any matters arising from or in connection with this report In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies Wong Ming Tek, Executive Director, ADBSR Singapore Thailand This report is distributed in Singapore by DBS Bank Ltd (Company Regn No E) or DBSVS (Company Regn No G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law Singapore recipients should contact DBS Bank Ltd at for matters arising from, or in connection with the report This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd Research reports distributed are only intended for institutional clients only and no other person may act upon it Page 13

14 Real Estate Office (China) United Kingdom Dubai United States Other jurisdictions This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority Research distributed in the UK is intended only for institutional clients This research report is being distributed in The Dubai International Financial Centre ( DIFC ) by DBS Bank Ltd, (DIFC Branch) having its office at PO Box 56538, 3 rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates DBS Bank Ltd, (DIFC Branch) is regulated by The Dubai Financial Services Authority This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it This report was prepared by DBS Bank Ltd DBSVUSA did not participate in its preparation The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents This report may only be distributed to Major US Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize Any US person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore Tel Company Regn No E Page 14