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Global financial crisis clouded the Greater China market

In the office sector, Shanghai and Hong Kong suffered most, seeing a sharp set back in demand due to the agglomerate of MNCs, many of which were adversely affected by the financial crisis. Meanwhile, the luxury residential markets in the region slackened, registering a price and rental fall.

Office Market
In Hong Kong, the average vacancy rate in Central increased from 1.54% in August 2008 to 3.45% in November 2008, as more strata-title vendors offered their vacant units for lease rather than for sale.  Meanwhile, the completion of a number of Grade A office developments in Kowloon East saw a slower-than-expected absorption rate, driving the average Grade A office vacancy as a whole to rise from 4.23% in August 2008 to 7.00% in November 2008.

With the dramatic retreat of new demand, the average Grade A office rentals dropped 18.7% quarter-on-quarter (QoQ) to HK$56.42 per sq ft per month in November 2008.  "The potential increase in vacant stock arising from lease restructures will continue to be the key uncertain factor for the local office market," noted Simon Lo, Director of Research & Advisory.  "Over the near to medium term, the office rentals are predicted to edge down by an additional 26%."

Meanwhile, many firms in Shanghai suspended their expansion plans and went for downsizing.  Together with the overhanging of large supply, the overall vacancy rate continued to stay at high level of 10.2% in 4Q 2008.  Due to the slackening demand, the landlords of the newly completed office buildings lowered their rentals aggressively in order to speed up leasing.

Consequently, the average office rental in Shanghai fell sharply by 21.6% QoQ to RMB8.1 per sq m per day, resulting in a rental drop of 10.1% year-on-year.  Meanwhile, the gross yield rose to 7.6%, reflecting the increased risk aversion of the investors who demand deeper discount in the purchase.  In anticipation of the abundant supply and moderating demand, it is expected that the vacancy rate will rise to about 15%, and the overall rentals will see a double-digit decrease.

In Taipei, some enterprises have been relocating their offices from CBD to outskirts since 3Q 2008.  Due to the financial crisis, the demand shrank and the vacancy rate rose from 6.09% in 3Q 2008 to 6.60% in 4Q 2008.  In order to prevent pending vacancy loss, some landlords lowered the rental rates upon rental cut request by tenants. 

Thus, the office rental edged down 2.03% from previous quarter to NT$2,504 per ping per month.  Meanwhile, the sales transaction volume of office properties dropped sharply due to the credit crunch and a decline in investment confidence.  The total investment amount of office properties plummeted 41% from previous year to only NT$27.7 billion.

In 2009, there will be 32,780 ping of office new supply.  With a shrinking demand due to the anticipation of economic downturn, there will be an increase in the vacancy rate and a drop of 5-7% in rental in the short term.  In the long term, Taipei's office market is promising with potential benefits from Three-Links that are taking place gradually. 

Luxury Residential Market
The Hong Kong residential market in 4Q 2008 experienced one of its weakest quarters over the past 3 years in terms of sales volume, seeing the number of transactions with lump sum consideration of HK$10 million or above plummeting by over 70% QoQ.  In 4Q 2008, the decline of luxury residential prices accelerated, falling 22.4% QoQ to HK$11,478 per sq ft. 

Meanwhile, the leasing market also saw a downtrend, with the demand dampened by the recent staff retrenchment particularly in the financial sector.  "The average luxury residential rental fell sharply by 15% to HK$39.53 per sq ft per month in November 2008," said Simon Lo.

"In the next 12 months, the luxury residential rentals and prices are forecast to decrease by 15% and 20% respectively.  However, if local banks start adopting less restrictive lending policies after the Lunar New Year in 2009, it might act as a support for the turnover to increase."

In 4Q 2008, the Central Government announced various monetary policies to stabilise the overall residential property market, including interest rates cut, taxes reduction, boosting exemptions, "Ten Point Opinions" and "New Six-Point Opinions".  However, the residential demand in Beijing was weak in 4Q 2008, due to the traditional low season during the festive period and the mid-to-low-level cut in expatriate hiring amid the financial turmoil.

Together with a new supply, a total of 1,898 units, the overall vacancy rate rose 4.78 percentage points QoQ to 28.86% in 4Q 2008.  Meanwhile, the luxury residential rental also saw a downward adjustment pressure, which decreased by 7.84% QoQ to US$22.58 per sq m per month in 4Q 2008.

Similarly, many companies in Shanghai slowed down their business expansion and started downsizing their operations, causing a fall in new leasing demand.  Seeing a subdued market, there was a limited supply of 92 new units launched into the leasing market.  In order to speed up leasing, the landlords were more eager to offer incentives.

Meanwhile, the average vacancy rate increased by 0.8 percentage point QoQ to 18.7%.  In anticipation of tightening housing budget for tenants, landlords have already adjusted their asking rentals.  Thus, the average rental dropped 3.8% QoQ to US$24.8 per sq m per month, while the luxury residential prices also saw a downtrend, falling to US$5,218 per sq m.