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Property Times: Hangzhou Q1 2012

May 11, 2012
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Property Times Hangzhou Q1 2012 Office rents grew steadily
23 April 2012 Contents
Executive summary Economic overview Offices Retail Industrial Residential Definitions Contacts 1 2 3 4 5 6 7 8 The average city-wide grade A office transacted rents increased to RMB 4.75 (US$0.75) per sq m per day at the end of Q1 2012, an increase of 0.89% quarter-on-quarter (q-o-q) and of 13.43% year-on-year (y-o-y) (Figure 1). In Q1, the average availability ratio reached 8.42%, a decrease of 0.11 percentage points q-o-q and of 14.60 percentage points y-o-y. 2 The overall average high-end rents for our selected retail hubs increased 0.22% q-o-q to reach RMB 41.59 (US$6.60) per sq m per day in Q1. In terms of the overall average occupancy rate for our four selected retail hubs, this increased by 0.31 percentage points q-o-q to reach 97.27%. Hangzhou saw moderate rents growth in the R&D office and manufacturing sectors during the quarter. The average rents for R&D offices reached RMB 45.0 (US$7.14) per sq m per month. The average manufactory rents stood at RMB 18.3 (US$2.90) per sq m per month, and the average rents for warehouse remained at RMB 19.5 (US$3.09). This quarter, Hangzhou's new high-end residential sales continued to slow. The average asking price for high-end non-serviced apartments fell by 1.28% to reach RMB 44,061 (US$6,994) per sq m. High-end villas dropped by 3.80%, to reach RMB 34,534 (US$5,482) per sq m. The average rents for high-end serviced apartments also decreased to reach RMB 120.0 (US$19.04) per sq m per month (a gain of 9.59% q-o-q).
Figure 1

Author
Shaun Brodie Head of East China Research Head of China Strategy Research +86 21 2208 0529 shaun.fv.brodie@dtz.com

DTZ Grade A office index (2005 ≠ Q1 2012)
Index (Q1 2005 = 100) 180

Contacts
David Ji Head of Greater China Research +852 2507 0779 david.yx.ji@dtz.com Hans Vrensen Global Head of Research +44 (0)20 3296 2159 hans.vrensen@dtz.com

170 160 150

140
130 120

110 100
90 80

2009

2010

Grade A office rental
Source: DTZ Research

Grade A office price

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2012

2005

2006

2007

2008

2011

1

Economic overview



Hangzhou's GDP in 2011 increased by 10.1% y-oy to reach RMB 701.2 billion (US$111.3bn). Meanwhile, from January to December 2011, the total industrial output above a designated size reached RMB 1,206.2 billion (US$191.5bn), a growth of 20.2% y-o-y (Table 1). From January to December 2011, disposable income per capita reached RMB 34,065 (US$5,407), a y-o-y increase of 13.4%. At the same time, living expenditure per capita reached RMB 22,642 (US$3,594), a y-o-y increase of 12.0% (Table 1). Fixed asset investment increased to RMB 310.5 billion (US$49.3bn) from January to December 2011. This was a y-o-y growth of 17.1%. Simultaneously, actual utilised foreign direct investment (FDI) in the city increased by 8.4% y-oy (Table 1). From January to December 2011, the accumulated consumer price index (CPI) was 104.8. Meanwhile, the total retail sales of consumer goods and services increased 18.7% (Table 1).

Table 1

Economic indicators y-o-y
Indicator Period Unit RMB 100 million RMB 100 million Value change (%) 10.1



GDP

2011

7,012

Total industrial output (above a 2011 designated size) Disposable income per capita FDI utilised Fixed asset investment 2011

12,062 20.2



RMB USD 100 million RMB 100 million -

34,065 13.4

2011 2011

47.22 3,105 104.8

8.4 17.1 4.8



Consumer price 2011 index
Source: Hangzhou Statistics Bureau

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2

Offices

As in many previous years, the Spring Festival holiday influenced the construction and the handing-over process of projects as workers gradually returned to work from the long journey home. At the same time, uncertainties surrounding the Euro zone debt crisis and a slowing Chinese economy had developers cautious about commencing construction or launching their new projects. This is reflected by the 12.2-point drop in the Q4 Enterprise Confidence Index ≠ Real Estate Sector, which hovered just above the expansion line at 107.2. As a result, the Hangzhou market witnessed no new supply of grade A office space this quarter and the total stock level remained at 1,423,829 sq m (Table 2). Demand was a mixed bag this quarter. On the one hand, we saw weakening external demand, in particular demand from Europe. We also saw Hangzhou's export-driven GDP growth rate slowing almost 2 percentage points while actual export growth decelerated by a massive 18.2 percentage points y-o-y in 2011. Along with this, we had the recent announcement of a lower governmental GDP target of 7.5%, announced during the Annual Parliamentary Session. As a result, in Q1 a number of companies delayed or abandoned their initial relocation plans. On the other hand, there were active groups of occupiers this quarter and these groups were generally the SOEs or companies of similar monetised background who often exhibit a more inelastic demand for office space. Consequently, the Hangzhou market's availability ratio dropped slightly, by 0.11 percentage points (Figure 3). Experiencing a quieter leasing market in Q1, the Hangzhou average grade A office rents remained steady at RMB 4.75 (US$0.75) per sq m per day, up 0.89% q-o-q (Figure 2), with the traditional MNC cluster region of Huanglong and the emerging CBD of Qianjiang New City registering the biggest quarterly gains. Despite the slow market this quarter, landlords in Hangzhou continued to uphold their high asking rentss on the basis of last year's large market absorption and the limited available space present in the market now and expected in 12 months' time. Looking forward, with an expected continuing slowdown in the economy, the net employment outlook is estimated to fall 2 percentage points q-o-q in Q2 2012. However, given the slim possibility of new supply completing in Q2 and market transactions expected to experience a pick up during the next quarter from the seasonal low seen in Q1, we estimate the availability ratio will remain low, which should support rents growth.

Table 2

Grade A office market statistics
Total stock (sq m) 450,225 246,134 129,373 598,097 Average Availability rents ratio (RMB/sq (%) m /day) 2.46 1.14 3.12 17.05 5.67 4.73 4.35 3.99 4.75 Change q-o-q (%) 1.43 -0.45 -0.57 1.92 0.89

District

Huanglong Wulin Qingchun Qianjiang New City Overall

1,423,829 8.42

Note: Rents equals "Gross Transacted Face Rents" Source: DTZ Research

Figure 2

DTZ grade A office index (2005 ≠ Q1 2012)
Index (Q1 2005 = 100) 180
170 160 150

140
130 120

110 100
90 80
2009 2010 2012
2005 2006 2007 2008

Grade A Office Rental
Source: DTZ Research

Grade A Office Price

Figure 3

Grade A office new supply, net absorption and availability ratio (2005 ≠ Q1 2012)
GFA, sq m 600,000
500,000 400,000

Availability ratio (%) 35
30 25 20

300,000
15 200,000 100,000 0

2011

10
5 0

2005

2006

2008

2009

2010

2007

2011

New supply sq m
Source: DTZ Research

Net absorption sq m

Availability ratio %

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Q1 2012

3

Retail

At the end of Q1, high-end retail stock remained the same at 709,930 sq m (Table 3), as no new supply completed in the quarter. Looking at the rest of the year, apart from Intime Hubin Phase II (Table 4), we don't see much new supply looking to enter the market. Looking further ahead, we expect new retail supply to be bolstered by the building of eight further subway lines, which are either under construction or being planned, which will see more shopping malls complete in the city's suburban areas. At the same time, to stay ahead of the curve and remain competitive, we can see some of the mature downtown commercial retail hubs, such as Hubin, undergoing a new cycle of brand upgrading. On the demand side, however, we have seen two instances of a market slowdown beginning to appear. Firstly, for the first time in three years, in 2011 Hangzhou Plaza slipped from first place in a ranking of annual sales and profit of national department stores and shopping malls. In fact, there were no Hangzhou department stores or shopping malls on last year's topten list. Secondly, in the period following the Chinese New Year holiday (a traditional high sales period), we witnessed flagging sales figures start to reappear, but this slow period to lasted much longer than in previous years. Consequently, the overall average rents in our selected retail hubs only managed a slight rise of 0.22% q-o-q to reach RMB 41.59 (US$6.60) per sq m per day in Q1 (Table 3). If the slower sales trend continues into the rest of this year, it could begin to place pressure on rents growth in the coming months. Having said this, however, there is currently tight supply in the Hangzhou retail market, with the occupancy rate actually rising 0.31 percentage points to reach an average occupancy of 97.27% (Figure 4). Many shopping malls, though, are set to open soon in the suburban retail hubs. Example projects include, Hangzhou Jiebai Lingyin Shopping Mall and Intime Chengxi Shopping Mall. Once this massive amount of new supply completes, we expect the city-wide average occupancy rate to soften in the short term, as the current level of demand will not be enough to fully absorb all the new space at once. Finally, the Jiebai Department Store announced in March that it will close buildings A and B for the purpose of refurbishment from May 2012 to March 2013. This closure will have an impact on the occupancy rate for Hangzhou's downtown area, but is not expected to negatively affect rents growth in the area.
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Table 3

High-end retail market statistics
Total stock (sq m) 175,330 71,600 76,000 387,000 709,930 New supply (sq m) Average rents (RMB/sq m /day) 59.50 37.40 24.20 33.67 41.59 q-o-q change (%) 0.28 0.18 0.83 0.22

Retail Hubs

Wulin Hubin Wushan Qingchun Road Overall
Source: DTZ Research

Figure 4

High-end retail rents and occupancy by district (Q1 2012)
RMB/sq m/day 70 Occupancy (%) 95

60
50 40

80

30
20

65

10
0 Wulin Hubin Wushan Qingchun Rd 50

Occupancy rate
Source: DTZ Research

Rental

Table 4

Selected high-end retail future supply
Retail hubs Hubin
Source: DTZ Research

Selected projects Hubin Development Phase II

Estimated launch date Q3 2012

4

Industrial & logistics



China's industrial production growth in January and February saw a slowdown according to data released by the National Bureau of Statistics. A yo-y growth of 11.4% was recorded in January and February this year, down from the 12.8% figure registered in December 2011. At provincial level, industrial production growth in Zhejiang Province recorded a significant decline, from 10% in December last year to 2.9% in January and February. Moreover, Hangzhou's industrial production growth in January and February this year also saw a decline of 1.8% y-o-y, down from 1.1% recorded at the end of last year. However, Hangzhou's average manufactory rents bucked the macro trend by recording a 2.9% increase from the last quarter (Table 5). This rise was principally due to the rents increase recorded in Hangzhou National Hi-Tech Industry Development Zone. On the back of strong take up, R&D office rents also gained momentum with a 5.8% q-o-q increase observed in Q1. This quarter, two plots of industrial land were transacted in the Hangzhou Economic and Technological Development Area (Xiasha), with an average sale price of RMB 481 (US$76.3) per sq m. Average land prices remained stable in both the Hangzhou Hi-tech Industry Development Zone and Xiaoshan Jiangning Development Zone, at RMB 480 (US$76.2) per sq m and RMB 432 (US$68.5) per sq m respectively. Overall, we remain cautiously optimistic with regard to Hangzhou's industrial property market in the short term. On the downside, a slowdown in both GDP and export growth could have a negative impact on the demand for industrial space. On the upside, however, government policy-led manufacturing upgrading, if successfully implemented, may become a new driver for the city's further economic expansion.

Table 5

Industrial market statistics
Rents (RMB/sq m/ month) R&D office Warehouse Manufactory
Source: DTZ Research

Change q-o-q (%) 5.8 2.9

45.0 19.5 18.3

Figure 5



Industrial rents as of Q1 2012
RMB/sq m/month

50
40 30 20 10

45

19.5

18.3



0
R&D Office Warehouse Manufactory

Source: DTZ Research

Figure 6

Industrial land price as of Q1 2012
RMB/sq m 490 480



480

480

470
460

450
440 430 420 410

432

400 Hangzhou National HiTech Industry Development Zone (Binjiang)
Source: DTZ Industrial

Xiaoshan Jiangning Development Zone

Hangzhou Economic and Technological Development Area

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5

Residential



Having weathered the liquidity needs of matured loans and expenses at year-end, some developers in Zhejiang began raising new capital internally, with employees offered an annual interest rate of 10-18%. Such financing channels are simpler than borrowing from the banks, given the needed collaterals and the tightened liquidity condition. They are also considerably cheaper when compared to the 25% required return from PE funds. Lessened financial pressure along with the traditionally slow season surrounding the Chinese New Year holiday saw developers continue to hold back project launches. Thus, the Hangzhou residential market witnessed no new high-end supply this quarter. Influenced by the Chinese New Year holiday, the first quarter is generally a cool season. This last quarter was no exception, given the current restrictive policies and the overpricing sentiment shared by many eligible home buyers. These factors were reflected in the transaction volume in the first two months, which was down 64% compared to November and December. Despite seeing a mini revival in February transactions, the 200,000 sq m monthly volume was still lower than any single month in 2011 and much of the sold space this quarter is believed to be from low- to mid-end projects. Mirroring the dampened sales volume, this quarter's average high-end residential price continued its downward adjustment, with the highend apartment average price dropping to RMB 44,061 (US$6,994) per sq m, a reduction of 4.83% y-o-y. At the same time, Hangzhou's high-end villa price fell for the fourth straight quarter, to RMB 34,534 (US$5,482) per sq m. Xihu is the only area in Hangzhou to witness a rise in high-end apartment and villa prices. On the back of rising inflation and labour costs, serviced apartment rentss have risen to RMB 120 (US$19.05) per sq m per month (a gain of 9.59% q-o-q) (Table 6). With the market dampening policies expected to remain in place for the rest of this year, we estimate further price corrections to be likely in the Hangzhou market for the short-term foreseeable future. Having said this, any primary market project that launches with a big sales discount should do well.

Table 6

High-end residential market statistics
New supply (sq m) Non-serviced apt Serviced apt Villa
Source: DTZ Research

Price (RMB/ sq m) 44,061 34,534

Rents Price (RMB/ sq change qm /month) o-q (%) 60.9 120.0 48.1 -1.28 -3.80

-



Figure 7

High-end residential supply and stock ≠ Q1 2012)
GFA, sq m (000s) 4,500
4,000 3,500 3,000
2,705 1,811 1,058 457457 601 753 3,343 3,994 4,193

(2005

4,193

2,500
2,000 1,500 1,000

894 638 651 199 0

500
0

2010

2005

2006

2007

2008

2009

2011



Supply
Source: DTZ Research

Stock

Figure 8

High-end non-serviced apartment residential price by district as of Q1 2012
RMB/sq m 60,000 50,000 40,000 30,000 20,000
48,523 44,107 43,494 37,510



10,000
0

Xiacheng
Source: DTZ Research

Xihu

Shangcheng

Jianggan

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Q1 2012

6

Definitions
Availability: Availability Ratio: Development Pipeline:

Total floorspace in properties marketed as available to let, whether physically vacant or occupied, and ready for occupation immediately. Total space currently available as a percentage of the total stock of floorspace. Comprises two elements: 1. Floorspace in course of development, defined as buildings being constructed or comprehensively refurbished to grade A standard; 2. Schemes with the potential to be built in the future, through having secured planning permission/development certification. The change in the total of occupied floorspace over a specified period of time, either positive or negative. Total marketed grade A floorspace which is ready for occupation now. Ready for occupation means practical completion, where either the building has been issued with an occupancy permit, where required, or where only fit-out is lacking. A development leased or sold prior to completion. The highest rents that could be achieved for a typical building/unit of the highest quality and specification in the best location to a tenant with a good (i.e. secure) covenant. (NB. This is a net rents, excluding service charge or tax, and is based on a standard lease, excluding exceptional deals for that particular market.)

Net Absorption: New Supply:

Prelet: Prime Rents:

Rents: Prime Yield:

Gross transacted rents (unless otherwise specified), which excludes management fees and other outgoings. The best (i.e. lowest) yield which could be expected for a typical building/unit of the highest quality and specification in the best location leased to a tenant with a good (i.e. secure) covenant. (NB. This is a net yield, which uses net income, after deducting all non-recoverable expenditure, divided by the purchase cost, excluding transaction costs and taxes.)

Market Yield: Stock: Take-up:

Annual transacted rents as a percentage of the capital value of the property. Total accommodation in the commercial and public sectors both occupied and vacant. Floorspace acquired for occupation, including the following: 1. Offices let/sold to an eventual occupier; 2. Developments pre-let/sold to an occupier; 3. Owner occupier purchase of a freehold or long leasehold. (NB. This includes subleases but excludes lease renewals.)

Vacancy:

Floorspace that is empty - i.e. not occupied. It may be being marketed, or it may not (whether because a lessee is not occupying, it is being refurbished, or it is deliberately being left empty by the landlord).

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7

Contacts
Consultancy
Michael Ma +86 21 2208 0381 michael.sw.ma@dtz.com

Property management
Chris Cheung +86 21 2008 0699 chris.kw.cheung@dtz.com

Industrial
Tony Su +86 21 2208 0255 tony.zy.su@dtz.com

Investment
Jim Yip +86 21 2208 0250 jim.ks.yip@dtz.com

Office
Mimie Lau +86 21 2208 0100 mimie.sw.lau@dtz.com

Building consultancy
Anthony Ng +86 21 2208 0168 anthony.m.ng@dtz.com

Residential
Jenny Wu +86 21 2208 0218 jenny.hm.wu@dtz.com

Retail
Raymond Wei +86 21 2208 0230 raymond.tm.wei@dtz.com

Valuation
Hans Gu +86 21 2208 0503 hans.yr.gu@dtz.com

Disclaimer
This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. © DTZ 2012
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