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REAL ESTATE: PRC Market Overview as at Q2 2012
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ECONOMIC BACKGROUND 
China’s GDP growth in the second quarter slowed further to 7.6 percent, the weakest since the first quarter of 2009 registered in the depths of global financial crisis. Combined with 8.1 percent growth of the first quarter, China’s economic growth was 7.8 percent in the first half of 2012, only slightly above the government’s full-year target of 7.5 percent. We expect China will continue to ease monetary and fiscal policy in the second half of 2012 to avoid the risk of hard landing. In response to the sharper-than-expected economic slowdown, the People’s Bank of China cut the benchmark interest rate in June, the first cut in the past three and a half years, followed by a further cut in early July. Signs emerged that those changes started to impact upon the economy. New loan creation has been increasing during the second quarter and growth of infrastructure investment rebounded significantly. Premier Wen Jiabao commented recently during his inspection tour in Sichuan Province that the government’s efforts to stabilise economic growth was taking effect and the second half of the year would see more efforts by the government to preset and fine-tune the policies. With June’s CPI and PPI at 2.2 percent and -2.1 percent respectively, providing the government plenty of leeway to further adjust its monetary and fiscal stance. 
 
In the first six months of 2012, the total sold GFA of commodity housing decreased by 11.2 percent year on year. But this was underpinned by preferential lending policies towards first-time home buyers and price cuts by developers, the scale of decline has been narrowing continuously during the second quarter. In June, the 70 large-and-medium-size cities new commodity housing price index’ even showed that 25 cities registered month on month increases of price, surpassing the number of cities recording negative price change and a significant rise compared with that in the first five months. In view of the recent rebound of the housing market, central government authorities have recently reiterated the importance of maintaining austerity measures towards the real estate sector. With HPR remaining the bottom line of the central government and abundant supply in the pipeline, we do not expect any significant rebound in property prices in the second half of this year.
 
NORTHERN CHINA 
The growth of the office market has decelerated for most of the Northern cities in the second quarter of 2012. For the second tier cities, the rental growth mainly came from market upgrade - the new or improved high quality projects have pushed up the market average rent. Among which, Shenyang recorded an impressive 5.7% quarter on quarter growth, while Dalian was up 4.3% quarter on quarter. Meanwhile, the overall vacancy rate stayed high for cities like Qingdao, Dalian and Tianjin, at 14.6%, 11.9% and 15.8% respectively. There is was new supply for most of the cities except Dalian during this quarter, but large amounts of future supply in cities like Tianjin and Qingdao is likely to exert pressure on the markets in the next few quarters. Comparing to the strong performance of previous quarters, Beijing’s office market had a rather quiet season with a 3.7% quarter on quarterquarter on quarter rent growth and vacancy rate further dropped to 4.0% as at end of June 2012. 
 
Driven by improving sentiment in the residential market, sales volume of luxury apartments continued to recover in Q2 2012, while prices in most Northern Chinese cities remained largely unchanged except for Dalian, up 4.4% quarter on quarter. In the leasing market, the luxury market in most cities recorded a mild rental growth within the quarter under review, with Dalian registering the largest quarter on quarter growth of 1.2%. 
 
The Northern China retail market experienced a correction in all five major cities. New projects with lower rents opened in all markets, which drove down the market average rental level. Dalian had the largest rental drop of 8.6% quarter on quarter due to over 80,000 sqm new supply. The rental decline in other cities ranged from 0.4% to 2.8% quarter on quarter. At the same time, most of the markets had seen their vacancy rates creeping up. By the end of the reporting period, Shenyang stood out with the highest vacancy rate of 17.8%,- mostly coming from this quarter’s new supply of 157,000sm. 
 
The North China logistics market carried on the growth momentum from previous quarters. Rental growth in the 5 cities ranged from 0.5% to 3.8% quarter on quarter. It is worth noting that the second tier cities, such as Shenyang and Dalian, had a stronger rental growth comparing to Beijing. Industrial land transactions further proved the trend of shifting activities to the second tier cities by the increasing transaction volume and price.
 






TIANJIN 
In the second quarter of 2012, Tianjin office rents remained stable, edging up by 0.7% quarter on quarter to CNY 130.7 per sqm per month. Leasing of Tianjin World Financial Centre remained active on the back of its prime quality and location. Huawei Technology Service Corporation and Tianjin Ever Credit Investment Co. Ltd rented 1,800 sqm and 800 sqm in Tianjin World Financial Centre, respectively. During this quarter, there was no new completion in Tianjin’s prime office market and the average vacancy rate dropped 3.9 percentage points over the period to 15.8%, 
 
Looking ahead, the trend might reverse with 10 new office projects due for completion in the second half this year and throughout 2013. With such a strong pipeline of new supply, we expect both vacancy rate and overall rental will be under pressure. 
 
In the second quarter of 2012, some commercial banks have lowered the mortgage loan interest rate for first-time home buyers, and most projects chose to cut their prices to boost sales. As a consequence, residential sales transaction volume has been rebounding continuously during the quarter, while the average price of luxury apartments dropped by 1.2% quarter on quarter to CNY 21,290 psm. 
 
During the same period, the leasing demand for luxury residences has increased. The average rent of luxury apartment increased by 0.9% to CNY 50.3 psm per month. 
 
In the second quarter of 2012, the average ground floor rent of retail properties in Tianjin decreased 1.0% quarter on quarter to CNY 21.5 psm per day. The 45,000-sm Youyi Gallery located in Qufu Road opened with a high occupancy rate. Some international retailers, such as Replay and Miss Sixty opened their first Tianjin store in Youyi Gallery. At the end of this quarter, the overall vacancy rate stood at 10.8%, down by 2.9 percentage points quarter on quarter. 
 
A number of new projects are scheduled for completion within the year, which will bring considerable leasing pressure to the market. 
 
During the second quarter, due to the scarcity of quality logistics space, the average rent of Tianjin logistics facilities rose 3.3% to CNY 28.0 per sqm per month. Meanwhile the average industrial land price increased 0.5% to CNY 457.7 per sqm. With increasing demand from e-commerce, retailing and 3PL occupiers, and the majority of key facilities to be delivered in near future being built-to-suit in nature, the industrial rent is expected to rise steadily in the second half of 2012. 

By CBRE
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