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News Release

Qingdao

Jones Lang LaSalle: Demand Heats Up While Oversupply Creates Challenges in Qingdao Commercial Sector in 4Q09


The global economic crisis continued to affect Qingdao’s real estate market in 2009, although  a slight increase in real estate demand was seen in the second half of the year (2H09).  This was fuelled by both a steady recovery of the residential and office markets, as well as continued aggressive expansion by mid-range retailers.  After falling since 3Q08, the average price of luxury residential properties began to rebound in the 2H09. Total units sold  increased 20% compared to the same period last year.
 
Office

As most office transactions closed in the first half of 2009, and companies had begun negotiations in the third or fourth quarter, the impact of the financial crisis, therefore, did not appear adverse in the 2H09.  Fuelled by healthy Chinese domestic and MNCs (multinational companies), demand for space actually increased slightly. As landlords recognized the rebound in the market, some even increased rental prices in 4Q09. As a result, the average rent for Grade B buildings reached 76.4 per sqm per month, up 2.7% q-o-q.
 
Underpinned by a large influx of domestic tenants, the overall vacancy rate of Grade B buildings remained the same at around 20% q-o-q.
 
In contrast, while high vacancy rates continued to put pressure on some Grade A office buildings, there were some unique cases however, of buildings being able to maintain rental rates - going against the general descending trend. Overall, a large majority of landlords saw their bargaining power diminished as favorable tenant terms, including longer rent-free periods and basic office fit-outs, were offered to keep occupancy stable. Rents for Grade A office space went down as the impact of the global economic crisis deepened last year. In 4Q09, the average rent for a Grade A office space decreased by 8.5% q-o-q to RMB 108 per sqm per month.
 
Due to the economic downturn and construction delays, completion of 202,000 sqm of office space was pushed to 2010. Eight projects totaling 367,000 sqm, including 87,500 Grade A office space, is scheduled for completion in 2010 -  four of which (totaling around 174,000 sqm) will be located in Shinan CBD, with three projects (134,000 sqm) located in Laoshan’s new business center.
 
Although demand is expected to increase, the influx of new supplies will push up vacancy rates in 2010, giving landlords substantial pressure. Local Chinese companies are likely to remain active in Qingdao, while demand from MNCs will recover gradually. For this reason, competition in the local market is expected to  remain in 2010.
 
Retail

In 2009, the Qingdao retail sector experienced steady growth as a result of favorable policies instituted by the government. Total retail turnover for the first three quarters of 2009 was RMB 127.4 billion, an 18.2% growth compared to the same period last year.
 
In 4Q09, Wanda CBD Plaza in Shibei District, one of the largest multi-use commercial buildings, was opened. This retail center features Van’s department store, Jusco supermarket, Wanda cinema, a games zone and other F&B anchors, with a total retail space of GFA 200,000 sqm (including hotel and office). Completion of around 173,000 sqm of retail space was postponed to 2010 due to unfavorable market conditions. In 2010, we expect a total of eight projects (579,410 sqm of retail space)  to be available, driving up overall vacancy to a level never seen before in Qingdao. Most of the retail supply will be targeted to mid-end tenants.
 
Fashion retailers began competing for market share in Qingdao by opening their first stores in key locations. They include Spanish-based fashion retailer, Zara, who opened its first store in Marina city at the end of2009, occupying 1,800 sqm at F1. Meanwhile, Uniqlo, Muji, and Sephora are expected to  open their first outlets in Marina City in the first quarter of 2010.
 
In contrast, the luxury brands market slowed down after policy changes implemented by local authoroties in Qingdao’s financial market. Celine, Sisley Beauty, The Beat Burberry did however open stores in Hisense Plaza in 2009.
 
High-end and Luxury Residential

While Shinan continues to be the preferred location for luxury and high-end residences, we saw Laoshan emerging as a viable contender to the high-end residential market, with villas and luxury apartments being developed.
 
In the first half of 2009, developers opted to wait for better market conditions to launch high-end developments. Average sales prices increased at a similar pace as the last two quarters. Around 1,320 units of new luxury projects were launched in the second half of the year, some of which achieved record-high sales prices for submarkets in Qingdao. For instance, the average sales price of Majesty Mansion reached 35,000 per sqm. Projects with a luxury positioning were warmly welcomed in the market due to their prime locations and potential strong rebound in demand. Domestic buyers continued to dominate the luxury and high-end market as 50% of buyers were local Qingdao residents, while the rest came from other cities.   Capital values of luxury apartments increased 6.1% q-o-q, reaching RMB 19,466 per sqm—the highest price recorded in the past few years.
 
With the government introducing several regulatory changes which should cool demand in 2010, we nevertheless expect capital values to continue to rise due to soaring land costs and continued bullish demand.

China Outlook

Across China, rents in the office sector fell at a slower rate as leasing demand in Tier 1 cities was robust, driven largely by domestic companies and purchases by owner-occupiers.  Like Qingdao, rents in Tier 2 cities also seemed to bottom, although net take up was slow in Grade A buildings in spite of demand from domestic companies. The retail property market saw rents rise slightly across Tier 1 and 2 cities, with strong demand from international brands keeping vacancy rates low.  Capital Values were up strongly in the luxury residential market in most Tier 1 cities. Transaction volumes slowed from their peak levels earlier in 2009, but most cities saw increased secondary market activity as many owners tried to take profits before tighter regulations came into effect in 2010. Tier 2 cities had similar performances with transaction volumes slowing but prices rising strongly.