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REAL ESTATE: Promising Signs Emerged, but Recovery Takes Time
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According to the National Bureau of Statistics, China GDP growth picked up to 7.9% y-o-y in the Q4 2012. This in line with our previous expectation of the bottoming-out of the economic growth. Preliminary statistics showed China 2012 GDP expanded by 7.8%, above the targeted 7.5% growth set in early 2012. Year-on-year growth of industrial value-added output and retail sales continued to accelerate in the last three months of 2012, indicating a gradual recovery of demand in the economy. Consumption once again overtook capital formation to become the biggest growth drive in 2012, while contribution by the tertiary sector also increased further. We believe the current recovery will sustain through most of 2013. In spite of the current rebound that was mainly led by increasing infrastructure investment and credit ease, we believe consumption will become a more important driver of growth with deepening economic restructuring and progress in supportive policies such as income distribution reform.
The housing market continued to rebound on the back of fundamental and upgrading demand. Year-on-year growth of accumulated national residential sales turned positive since November. Throughout 2012, the total residential properties sold stood at 985 million m2 in China, up by 2.0% from 2011. Meanwhile, 70 Large-and-Medium-Size Cities New Commodity Housing Price Index showed that housing price increased in 54 cities in December, more than the numbers recorded in any of the previous 11 months of 2012. In addition, the continued buoyant sentiment in land market and significant improvement of new construction starts in Q4 both indicated the recovering confidence and market outlook of developers. With land purchase and new construction starts, still recorded a y-o-y decline in 2012, we expect the inventory will remain at a reasonable level in major tier-1 and tier-2 cities in 2013, given the brisk market sentiment currently, and there might be upward pressure for moderate growth of housing price. However, as the recent Central Economic Work Conference stressed the continued macro control on the real estate market, new curbing regulations will possibly be implemented by the government if the housing price rises too fast.
Market Performance
In response to the slowdown of the domestic economy - compounded by a number of uncertainties in the global economy as a whole - many multinational companies have suspended their expansion plans in China in 2012. A number of domestic companies have also slowed down the pace of business expansion, which has had a profound impact on the office market. In 2012, the demand for office space across China continued to decrease, with net absorption falling by over 40% y-o-y. From a regional perspective, the net take-up in Eastern and Northern China each shrank by more than 50%. On the other hand, Western China stood out with an 8% y-o-y growth in net take-up, thanks to the central government’s “Go West” policies as well as the ongoing development of the local office market. In terms of supply, numerous projects that were originally scheduled for completion in 2012 delayed their construction in response to economic uncertainty both in China and abroad. This caused the amount of new supply to decrease by 30% y-o-y. Against a backdrop of significant decrease in demand, vacancy rates increased to 12.8% - up 1.1% point y-o-y following three consecutive years of decline. While rental growth had decelerated rapidly in 2012, it managed to report a y-o-y growth of 3.6% nation-wide. In Beijing, office rental experienced double-digit growth for the last three years due to lack of new supply. Among second-tier cities, Wuhan also experienced double-digit growth in office rent for two years in a row. 
Owing to housing policy restrictions and other austerity measures to control investment demand, the high-end residential segment remained sluggish in the first half of 2012. However, as the overall residential market continued to recover, the high-end segment warmed up rapidly in the second half of 2012 with a significant rebound in transaction volume and stable prices.
In 2012, domestic retail sales growth decelerated, yet still registering double-digit growth. In view of this, most retailers still maintain a relatively optimistic outlook for the future prospects of the market. Foreign retailers continued to expand their footprints, although in a more cautious and selective manner. In first-tier cities, demand for top-location retail property remained strong. Premium brands further expanded into new markets in second-tier cities - especially those in Midwest China - which caused the net take-up of retail property in 2012 to increase by 2% y-o-y. New supply, on the other hand, increased by 22% y-o-y nationwide, of which over two-thirds came from second-tier cities. In terms of location, nearly two-thirds of new supply surfaced in emerging areas. Retail rent in 2012 increased by 3.4% y-o-y. Of particular note is the retail rent in first-tier cities, which experienced a y-o-y increase of 5.4%. Among second-tier cities, Wuhan and Hangzhou performed well with over 6% y-o-y increase. Shenyang bucked the trend to register a marginal decline in retail rent, driven by an ongoing surplus in supply over the past several years.  

China’s warehousing and logistics market remained active, mainly driven by demand from both e-commerce and traditional retail industries. Due to limited supply in past several years and the low vacancy rate across the industry, the warehousing and logistics sector remained a landlord-driven market. By the end of the fourth quarter, average rent in 13 of the 15 cities that CBRE covered was reported to have experienced varying degrees of growth. As increasing enterprises relocated their production bases to inland provinces for cost-savings, the market in Central and Western China was particularly active.
Outlook in 6 Months 

Looking into 2013, we expect the domestic economy will continue to undergo the slow recovery that began in the fourth quarter of 2012. After pulling through the European debt crisis and avoiding the US “fiscal cliff,” the global economy should also stabilize in 2013. The demand for commercial property is expected to pick up along with the gradual recovery of domestic and external economies. 
As for the office market, in view of a burgeoning supply of new office space in the pipeline across the country - particularly in a number of second-tier cities - vacancy rates will continue to rise, and the rent in some cities will begin to face pressure. 
The new supply of retail property is expected to further increase in 2013. Driven by a resilient domestic consumption market, retail rent will steadily increase while vacancy rates are expected to edge up as well. 
The residential market will not experience explosive growth in demand due to the impact of restrictions on home purchases and other clamp-down measures. However, as the market is likely to be driven by fundamental demand, the residential market in 2013 will maintain stable growth. 
Demand for logistics space is expected to remain robust given the gradual recovery of industrial enterprises and sustained consumption growth. As most local governments continue to exercise strict control over land supply for warehousing and logistics, it is estimated that the current under-supply situation will continue in the foreseeable future. Hence, we expect steadily rising rent for the logistics/warehousing sector.
Update on Prime Property Sectors in Tianjin 

Office Market 
During Q4 2012, TEDA MSD-B1 in Binhai New Area came onto the market, adding a total GFA of 64,500 sm. The building currently has a very low occupancy rate and as a result, overall vacancy rate increased 2.8 percentage points to 16.9% in TEDA. Meanwhile, financial and trade industries remained active in the market with Japan Mizuho Corporate Bank Tianjin Branch setting up a branch in International Building in order to expand its downtown area business. During the quarter, Tianjin average office rent increased 0.9% q-o-q to RMB 132.1 per m2 per month, or 0.2% on a like-for-like basis. 
In the next six months, Hutchison Whampoa’s Metropolitan Tower in Nanjing Road and Golden Valley Center along the Haihe Riverfront are expected to be launched, adding 160,000 m2 of office space. We expect supply will become more abundant in H2 2013. Overall, Tianjin office market will be under pressure both in terms of rental and vacancy rate. 
Luxury Residential Market 

During Q4 2012, Tianjin luxury apartment sales continued to recover while developers became more active with launching new projects. High-end projects such as Horizon Capital and Financial Street Center have achieved outstanding sales performance. Thanks to improved market sentiment, average price for luxury apartments increased 1.1% q-o-q to RMB 21,452 per m2. With the opening of Metro Line 3 which links to all existing metro lines and the high-speed train to Beijing, rents for properties along the metro line continued to rise. The average rent of luxury apartments rose by 0.8% to RMB 51.2 per m2 per month. 
Retail Market 

During Q4 2012, Solea City in TEDA MSD-A came onto the market, adding approximately 29,000 m2 of new supply. Moreover, H&M opened its 6th Tianjin store in Solea City. During the quarter, La Vita in Nanjing Road and Happy Shopping Center in TEDA completed their tenant mix adjustments, and as a result, overall vacancy rate decreased 3.3% points q-o-q to 12.8%. Meanwhile, average ground floor rent for retail properties in Tianjin increased 2.7% q-o-q to RMB 22.2 per m2 per day, or 0.2% on a like-for-like basis. 
In the next six months, a number of new projects are expected to come onto the market, including Isetan in TEDA MSD-B and G-Yuanbao Yujiapu Shopping Center in Xingang Road, totaling 180,000 m2. This substantial new supply is expected to intensify competition among landlords with vacancy rate to increase accordingly. 
Logistics Market 

During Q4 2012, average rent for logistics facilities increased 1.6% q-o-q to RMB 29.0 per m2 per month. Demand from FMCG and e-commerce was the major drivers. For example, Nestle leased 24,000 m2 of warehouse space in Gazeley Beichen Logistics Park as its North China distribution center. In the meantime, average industrial land price in Tianjin slightly increased by 0.1% to RMB 458.3 per m2. 

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