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News Release

Guangzhou

Challenges and Opportunities Abound for Guangzhou Property Market in 2009 as the Strategic Positioning of Pearl River Delta Remains Unchanged

Jones Lang LaSalle 2008 Property Review


Looking back at the year 2008, an economic slowdown swept across China due primarily to the global financial crisis. As an important economic center in South China, Guangzhou was not exempted from the slowdown—with its property, foreign investment and export sectors affected most significantly. Since early 2008, the Guangzhou property market has witnessed declines of varying degrees both in transactions and the average price, and has shown a tendency of gradual shrinkage. “Although the government’s financial policies have been instrumental in stimulating the domestic demand to some extent, Guangzhou’s real estate market will face both challenges and opportunities in the year 2009,” noted Jex Ng, Managing Director for Jones Lang LaSalle Guangzhou.

Economics and Investment

In the first three quarters of 2008, Guangdong’s GDP increased by 10.4% as compared with the same period in 2007. This is a marked slowdown as the growth rate falls back to the average level of the country—a different scenario from the previous leading position Guangdong maintained for a number of years. In the first three quarters of 2008, Guangzhou GDP increased by 12.1% over the same period in 2007, lower than the growth rate of 14.5% for the same period in 2007 as well as the 2007 annual growth rate of 14.5%. Official estimate goes that the economic growth in Guangzhou for 2009 will witness a significant decline, reaching only more than 12%.

Due to the lingering global financial crisis, China’s export sector has been substantially affected as evidenced by decreases in orders from major export destination countries and regions like Europe and America. China’s export-oriented economy is now facing a serious challenge: affected by the shrinking domestic and foreign consumption markets, China is undergoing an economic downturn; Guangdong’s growth in industrial production has slowed down, affected by the continuous increase in the prices of energy and raw materials, and national macro regulation. These have led to an increase in operational costs of enterprises in Guangdong, expanded difficulties in enterprise operation and a narrowed profit space, evidenced by the decline in the total industrial output of Guangdong province and Guangzhou in the fourth quarter. Obviously, the present situation is posing a serious challenge to the economic development in the Pearl River Delta.

Meanwhile, the consumption and investment intentions have been affected with the disappearance of the Fortune Effect. The Composite Index of Shanghai Stock Market fell to 1,821 points in 2008, dropping 3,440 points, while Individual investment and consumption intentions have been affected as a result of the downturn in the stock market. For now, the bank savings rate has been increased due to the drop in housing prices and narrowed investment channels.

However, the decline in inflation has offset some negative factors, with Guangzhou’s local consumption free from the economic impact. Guangzhou CPI fell back to 3.4% in November from 8.6% in February 2008, the highest point recorded in the past 11 years. For the time being, the per capita living expenses have not been affected by the economic downturn and shown a gradually upward tendency.

Since the very beginning of 2008, however, the whole Guangzhou property market has witnessed declines of different degrees both in transactions and the average price, and has shown a tendency of gradual shrinkage. From January to November in 2008, the total market transactions decreased by about 33%, and the transacted area decreased by 38% as compared with the same period in 2007.

In order to stimulate the domestic demand and strengthen the confidence in investment, the government has adopted a package of policies, including continuously slackening the monetary policies, expanding the government investment, loosening some housing policies, and leveraging the advantages of the Pearl River Delta to strengthen the cooperation among Guangdong, Hong Kong, and Macau. All of these will be instrumental to some degree in promoting the economic development in Guangzhou in 2009. “Although the economic prospect in 2009 continues to be hardly optimistic, the strategic position of Guangzhou and the Pearl River Delta will remain unchanged,” said Marcos Chan, Head of Jones Lang LaSalle Research in Greater Pearl River Delta.

Grade A Office

In 2008, strong demand in the first three quarters helped boost the total annual Grade A Office take-up, which reached 338,408 sqm, up 16.3% from 2007. Overall vacancy rate dropped 4 percentage points from 25.3% at end-2007 to 21.3% at end-2008, largely a result of moderate supply volume and strong expansion in the first three quarters of 2008. Tianhe CBD, the current CBD, saw the largest amount of net absorption in 2008, which shows that the district remained a sought-after area for business expansion. On the other hand, Zhujiang New Town witnessed slower net take-up in 2008 due to less volume of new supply in the district than a year ago.

New supply completed in 2008 triggered a great many cases of relocation and expansion. The majority of large leasing transactions happened in 1H08. Vacancy rates dropped for quality buildings in the Tianhe CBD and Zhujiang New Town, which were completed in the past one to two years. Examples of the said buildings are the International Finance Place, Teem Tower, China Shine Plaza, and Skyfame Tower.

However, the global financial crisis accelerated the downward trend of the Guangzhou office market. The market began to enter its decline circle from 2007; affected by the recent gloomy economic environment, a greater rate of rental drop was recorded at 7.6%. The capital value of Grade A office also began to decline synchronically with the rental in 2008. Reduced demand, rental drop, high vacancy rates coupled with the financial storm led to the slump of investor confidence. Therefore, Grade A office capital value faces high adjustment pressure. It began to drop by 8.1% q-o-q in 4Q08 and by 6.3% annually.

In 2009, a total of 360,000 sqm of Grade A office supply is expected to enter the market. Zhujiang New Town will remain the area where new supply comes from. It is estimated that part of owner-occupied demand in new supply in 2009 will help support the net take-up this year, such as GoTone Tower and Winner Plaza in Zhujiang New Town.

According to Victor Mar, Head of Jones Lang LaSalle Guangzhou Markets, the ongoing global financial crisis is expected to continue to affect Guangzhou’s Grade A office market from both the demand and supply perspective. Short-term lease renewal will remain preferable to many MNCs than be committed to permanent expansions. Reducing demand coupled with supply overhang will push up vacancy rates, leading to a strong tenant market – a good time for rental bargaining. Therefore, Grade A office rents is expected to fall significantly in 2009.

Retail

The slowdown of the economic growth also resulted in a slowing increase in the total retail amount in 4Q08. The government estimated that the total volume of the actual retail sales for social consumer goods in 2008 would hit RMB 310 billion, an increase of 20%, which is higher than the 18.9% recorded in 2007. In 2H08, however, there appeared a sign of a slowdown in the growth.

The discreet financing idea resulted in a slowdown in the growth rate of the number of Guangzhou passengers and the income from tourism. As a result of the global economic downturn and the drop in the number of the participants in the 104th Guangzhou Fair, the number of oversea tourists has significantly dropped from January to November 2008. Of which, six months have witnessed a negative increase in the tourist number as compared with the same period in 2007. From January to November 2008, the foreign exchange earnings from tourism decreased by 0.5% as compared with the same period in 2007.

The change in the consumption atmosphere also resulted in a slowdown in the growth rate of the retail rents in the second half of 2008. Despite the slow down in the economic growth in 2008, the brisk demand in the retail market in the first three quarters of 2008 combined with a high-profile market supply have resulted in an annual rental increase of 13.8%, higher than 9.6% in 2007. Despite this fact, the falling demand as a result of the financial turmoil will limit the rents in the fourth quarter to a slight increase of 1.8% even if there is an increase in the consumption volume at year-end, showing a notably downward tendency of the rental growth.

Despite that, the strategic position of Guangzhou still wins the favor of international brands. For instance, Guess made its way into Grandview Plaza and China Plaza in the fourth quarter. Guangzhou’s image as a high-grade retailer will reach new heights in 2009. The completion of the construction of Onelink Plaza, Metropolitan Plaza, and GT Land Plaza will give the market a totally new look.

According to Simon Lam, Head of Retail, Jones Lang LaSalle for Guangzhou and Shenzhen, the disappearance of Fortune Effect combined with the poor employment prospect has affected the confidence of consumers and reduced the expansion demand of retailers. It is expected that the retail consumption volume in 2009 will be reduced and luxury and large-commodity consumption will witness a significant decline. However, as a major consumption market in South China, Guangzhou will continue to be a center of attention for international brands. The demand for retail spots with advantageous locations is expected to be slightly affected. Rental drops will help improve tenants’ position during price negotiations.

Business Park

The direct foreign investment witnessed a reduced increase. Affected by the global economic credit crisis, the investment has withered considerably. Guangzhou FDI in 2H08 showed a slow upward tendency, with a slowdown in the demand of industrial parks.
 
The central park area of the city is more in demand, while some tenants are also interested in suburban projects as evidenced by the Tianhe Science and Technology Park. The park has been attracting a large number of high-tech companies keen to establish headquarters and R&D centers because of its short distance from the Tianhe Central Business District, its advantageous position, and strong regional gathering ability. Therefore, the overall vacancy rate of the park is satisfactory, while the Science Town will become the main concentration place for new supplies in the future. It is expected that more than 570,000 sqm of new supplies will be completed within this year, including the Technology Plaza, Guangzhou International Security Data Solutions Center, and Guangzhou Innovation Base of Tsinghua Technology Park in Panyu District. So far, the new supplies in the Science Town have attracted some famous multinational companies to settle down.

Marcos Chan concludes that due to the global economic downturn and the decline in the investment in business expansion, the newly increased demand of Guangzhou Industrial Park has been slowed down. The adequate supplies from the Science Town will further curb the increase in the overall rents. From a medium and long-term perspective, the tendency of economic structural adjustment and enterprises considering establishing offices in different places to save costs will have a positive effect on the industrial park.

Residential

The year 2008 also witnessed a residential market depression, with a strong atmosphere of sitting on the fence. The sales volume from newly-built residential housing has decreased as compared with the same period in 2007, selling only 5.52 million sqm for the whole year, a decrease of 31% as compared with the previous year and reaching the lowest point after 2001.

The average monthly transaction price fluctuated considerably, with the lowest point in December 2008, a decrease of about 30% as compared with the historical highest point in October 2007. Despite that, the annual average sales price for 2008 was still maintained at a high level, up 9% over the same period in 2007.

The shrinking transactions volume has brought great financial pressure to many developers. Although the government issued a package of positive policies at end-2008, no notable results have been achieved yet. Meanwhile, guaranteed housing construction plans have led to market worries that the residential housing space will be narrowed considerably.

Looking to the year 2009, John Tian, Head of Strategy Consultant of Jones Lang LaSalle, thinks that the negative impact resulting from the financial turmoil and macro economic regulation and control on the confidence of consumers will continue for some time. Meanwhile, in order to get out of the difficult situation, developers will continue to cut down on the construction of new projects and increase the publicity on in-stock houses, which will gradually relieve the situation of oversupply to some degree. In addition, the results of the government policies to stimulate the market will become more apparent. Although still faced with some reduction pressure, the overall housing price will gradually become stable, while the reduction scope of the housing price for matured urban areas is limited.