Office demand weakened in the region as many companies suspended expansion plane, and some consolidated their operations and even pursued for downsizing. In 1Q 2009, major office markets in Mainland China saw their vacancy rate surged to double-digit level, while that of Hong Kong and Taipei remained at single-digit level. Meanwhile, many landlords were more pragmatic to adopt price cutting strategy to attract or retain tenants amidst rising vacancy.
Amongst the key cities in the region, Hong Kong office rentals reported the largest decline. In the luxury residential market, Hong Kong, Beijing and Shanghai were more affected by the tightened budget of multinational companies (MNCs) for expatriates. Thus, these markets saw a relatively larger drop in their luxury residential rentals in 1Q 2009.
Office Market
Hong Kong's Grade A office markets continued to suffer from a lack of new leasing demand, in anticipation of a global recession and significant business slowdown across the board. In order to reduce rental outgoings, existing tenants tended to have negotiations for lower rental rates, office decentralization, consolidation of floor area requirements, downgrading to second-tier developments or a combination of the above. In 1Q 2009, some sizeable multinational tenants have even started returning some of their committed space to the market.
As a result, the overall vacancy rate edged up to 7.43% in February 2009. Meanwhile, the average effective Grade A office rental significantly fell by 15.7% QoQ to HK$47.56 per sq ft per month. Overall, office rental is projected to fall 25% in the next 12 months if the current trend of rising vacancy continued.
In Shanghai, two Grade A office projects completed in 1Q 2009, including Gubei International Fortune Center Phase 1 and BEA Finance Tower. However, both of them saw unsatisfactory response to their pre-leases. In 1Q 2009, the Grade A office vacancy rate hit a record high since 2005, at 12.3% in 1Q 2009. Meanwhile, the vacancy rate in Pudong registered 16.5%, which was much higher than that of 9.7% in Puxi.
In order to attract tenants, the landlords of the ordinary Grade A offices cut their asking rentals substantially. However, the drop in rental of premium Grade A offices was relatively smaller. In general, the average office rental declined 6.2% QoQ to RMB7.6 per sq m per day. As there has been no sign of improvement in the external environment, the downward pressure in Shanghai's Grade A office market is expected to continue.
In Beijing, the local government was more proactive to stabilize the office property market through introducing new incentives to stimulate occupational demand, for example, the policies recently released by the National Development and Reform Commission (NDRC) at Chaoyang District level. In 1Q 2009, the volume of leasing transactions continued to decline due to occupiers' increasing hesitating attitude.
The overall Grade A office vacancy rate increased by 0.9 percentage points to 17.38%. Meanwhile, many landlords started to offer more concessions in rentals and leasing terms. Thus, the average net effective rental of Grade A office dropped 5.55% QoQ to RMB 182 per sq m per month as at the end of 1Q 2009. After the Chinese Insurance Laws were revised at the 11th National Peoples Congress, Chinese insurance companies became eligible to invest in the real estate market. About RMB 100 billion from the Chinese insurance institutions is expected to allocate to the property sector.
Luxury Residential Market
Although individual banks started to adopt less restrictive lending policies in Hong Kong in 1Q 2009, the number of sales transactions failed to catch up to the average level during the period before the onset of the financial crisis. Also, the property prices continued to decline with the lack of occupational support. Overall, the average luxury residential price fell 7.4% QoQ to HK$10,630 per sq ft as at the end of February 2009.
Meanwhile, the general reduction of housing budgets by many companies prompted vendors to cut their asking rentals further. As at the end of February 2009, the average luxury residential dropped 8.5% QoQ to HK$36.18 per sq ft per month. Looking forward, the sustained weak leasing demand is anticipated to drive rental down further by 12% over the next 12 months.
In January 2009, the Beijing government announced a policy that highlighted the temporary suspension of the restriction on foreigners to purchase properties in Beijing, and the favourable lending rates offered to second-home buyers under the condition of improving living standards. In 1Q 2009, the residential leasing demand from both mid-to-low level expatriates and senior executives at MNCs continued to dwindle, since the MNCs postponed or withdrew further investment, or even closed down their operation in Beijing. Thus, the overall luxury residential vacancy rate rose by 0.73 percentage points QoQ to 29.51%, while the rental dropped by 11.60% QoQ to US$19.96 per sq m per month in 1Q 2009.
In Guangzhou, the expatriates returned their home country upon their contract expiry at the year-end, and newly employed arrived in 1Q 2009, thus bringing new demand to the residential leasing market. Therefore, the overall vacancy rate of serviced apartment declined 1% QoQ to 22%. Meanwhile, most transacted leasing units were relatively small in size. According to statistical information, the tenants mainly committed apartments for individual use rather than for family purposes.
It can be explained that individual employees were arranged to fill relocation positions in order to minimize the company's welfare spending. In the coming 6 months, there will be no new supply and the market will keep on absorbing the current stock. It is forecast that the demand and rentals in Guangzhou will maintain their stable trends.