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Tianjin, 13 October 2017 – "After the opening of the first Grade A building completed in Hongqiao district, Tianjin Lujiazui Plaza, we will see a new supply wave of Grade A projects in emerging areas, that give tenants access to quality buildings across multiple submarkets in Tianjin" said Michael Hart, Managing Director of JLL Tianjin. Meanwhile, in the retail sector, leasing activity by the fashion, jewelry and electronics sectors picked up and the market landscape was now expanding at a slower but steadier pace after a supply influx. Leasing showed a slowdown in the logistics sector, where industry-leading companies were relatively quiet in seeking space. The high-end residential market cooled down with lower transaction volumes and a slight decline in prices, influenced by the tightening measures of 1H17.
One Grade A building was completed in 3Q17, Tianjin Lujiazui Plaza Building A, which located in Hongqiao district, adding 94,725 sqm to the market. As the first newly completed Grade A project in 2017, its completion brought total Grade A stock to about 917,000 sqm, an increase of 11.5% q-o-q and 17.6% y-o-y. As this new completion entered the market with over 75% vacant space, the Grade A vacancy rate saw a slight increase of 0.2 percentage points q-o-q and a decrease of 2.7 percentage points y-o-y. No Grade B projects were completed in the quarter so Grade B stock remained unchanged at 1,893,000 sqm, enabling the Grade B vacancy rate to decrease slightly by 0.5 percentage points q-o-q and 1.9 percentage points y-o-y, to 32.1%.
Total net absorption reached 55,000 sqm in 3Q17, double the amount of the previous quarter. Demand came largely from the finance sector, especially MNC non-banking financial institutions and insurance companies. For example, Home Credit, a Czech consumer finance service provider, continued to expand its business following the increasing retail sales in China and leased another 21,000 sqm in Tianjin Lujiazui Plaza Building A. It had already leased about 10,000 sqm office space in other office projects in Tianjin. Additionally, Metlife returned 2,000 sqm to previous landlord and leased over 5,000 sqm in Vantone Center, a Grade A project that came on stream in 3Q16. Domestic finance companies continued to play important roles in demand this quarter. Sunshine insurance expanded by another 450 sqm in Vantone Center.
Net effective rents continued to decline, falling 0.5% q-o-q and 2.7% y-o-y, to RMB 92 per sqm per month on a like-for-like basis. Grade A rents fell 0.3% q-o-q and 3.4% y-o-y to RMB 103 per sqm per month. Sustained high market vacant space in the Grade A market caused landlords to lower rental expectations to find tenants to absorb it. Grade B rents declined 0.6% q-o-q and 2.3% y-o-y to RMB 87 per sqm per month.
Only one more project is expected to complete in 2017, and this will add around 52,000 sqm with a vacancy rate expected to be little changed at 37.4%. On September 1 2017, the Tianjin Environmental Protection Bureau officially announced that, in a bid to improve air quality in winter, almost all major public construction projects within Tianjin's six major districts and surrounding suburbs will be halted from October to March. "Some projects due for completion in 2017 and 1Q18 have been delayed by the restrictions but it is a competitive environment with many large-sized completed projects left with large amounts of vacant space. It is expected that landlords will continue to lower rents to absorb vacant space over the next year", noted Weiran Lv, Head of Markets for JLL Tianjin.
Industry-leading companies were relatively quiet in seeking space in the non-bonded market during 3Q17. New leasing demand slowed in the non-bonded market, although there were some small deals by third party logistics (3PL) companies. A domestic 3PL company, leased 3,000 sqm in GLP Park Pujin Phase II. Total net absorption was negative at about -21,000 sqm, as leasing volume slowed and the market witnessed tenants handing back more than 24,000 sqm. A Japanese logistics services provider, returned 20,000 sqm to the market.
Two new projects, GLP Park Beichen Phase II and Zhongchu Beichen Logistics Centre Phase I, entered the market in the Beichen sub-market, adding 88,000 sqm of space to the market. Due to relatively slow leasing progress during the quarter in both existing projects and new supply, the non-bonded market vacancy rate rose 3.5 percentage points q-o-q and 2.8 percentage points y-o-y to 21.8%.
As rents for existing projects were unchanged due to slow leasing progress, net effective rents remained stable at RMB 0.92 per sqm per day on a like-for-like basis.
By end-2017, five new warehouse projects are expected to complete in five different sub-markets, adding a total of around 196,000 sqm. "E-commerce, retail and 3PL companies will remain the major market drivers and are especially active at year-end, when large e-commerce firms, such as JD.com, hold promotional activity for 'Double 11' in November. This will trigger short-term leasing demand from e-commerce and supporting 3PL companies", noted William Gao, Head of Industrial for JLL Tianjin. While the leasing demand will be moderate, a large amount of new supply will push the vacancy rate up by 4.1 percentage points y-o-y to 23.7% by end-2017. The relatively competitive non-bonded warehouse market will limit rent growth. We expect slower rent growth, down from our previous forecast of 1.4% y-o-y to 0.9% y-o-y on a like-for-like basis by end-2017.
New leasing demand kept stable, with net absorption reaching 61,608 sqm, a decrease of 67.3% q-o-q but an increase of 101.8% y-o-y. As no new supply entered the market in 3Q17, all new leases came from the existing projects during active tenant adjustment in several malls, such as Joy City Nankai and Riverside 66. For example, Xiaomi leased about 300 sqm and Lego leased about 200 sqm to fill the empty space after Gap closed its store in Joy City Nankai. A new Mjstyle occupied about 500 sqm to replace another Gap in Riverside 66. Leasing demand saw a large variety in terms of retail sectors. In addition to the traditional hot sectors, such as F&B and child-related brands, the jewellery, apparel and electronics sectors also saw active expansion.
No new mall opened in 3Q17; however, one mid-to-high-end department store, Youyi Department West Wing, closed in the Youyi submarket. Because of this, total stock of high-quality retail market space shrank by 21,000 sqm to 4.0 million sqm. A lack of public space, old interior decoration and facilities, as well as a lack of tenant mix adjustment may be the main reasons for the underperformance before the closure. "The closure reminded retail developers and operators that they are in an increasingly competitive market with more savvy shoppers," noted Sunny Yin, Head of Retail for JLL Tianjin.
The market average vacancy rate dropped for the third consecutive quarter to 12.3%, a decrease of 1.6 percentage points q-o-q and 2.0 percentage points y-o-y, due to the modest leasing demand.
Net effective rent rose to RMB 11.6 per sqm per day, an increase of 1.2% q-o-q and 2.9% y-o-y on a like-for-like basis. Mature shopping malls with tight vacancy rates in both the core area and communities, such as Joy City Nankai and Aeon Shopping Centre (Meijiang), were the main contributors to the rising average rent.
Looking forward, two new retail properties are expected to enter the market by end-2017, adding 56,000 sqm of shopping space. We forecast that leasing demand will likely continue to be robust, as several fashion and jewellery brands have committed to space in the main retail malls, such as Riverside 66 and Joy City Nankai. Benefiting from growing leasing demand and a decelerating supply pipeline, we forecast the overall vacancy rate will keep declining by 11.8% and, accordingly, rent will grow mildly.
The tightening measures that took effect in 2Q17 largely curbed the 3Q17 transaction volume, by restricting housing demand, especially from buyers aiming to upgrade or invest. In addition, several banks raised mortgage rates by 10%, even for first-time buyers, which made purchasing a house more difficult. As a result, only 607 high-end apartment units were sold in 3Q17, down 15.1% q-o-q and 77.7% y-o-y.
A total of 680 units were launched in 3Q17, a slight decrease of 8.2% q-o-q and a decrease of 67.6% y-o-y. The new Badali and Meijiang submarkets were the only two submarkets with new launches. These mainly came from Tianjin Lake and Vanke Dongdi Meijiang.
Capital values in the high-end residential market declined moderately, dropping 10.1% q-o-q but rising 8.9% y-o-y in line with the limited transaction volume and decreasing sales rate. Most of the new projects are located relatively far from the city centre. As a result, projects launched at competitive prices attracted price-sensitive first-time buyers, who were the main contributors to the sales transaction volume. For example, 224 new units of Vanke Dongdi Meijiang High-rise sold at an average price of RMB 28,000 after being launched in the quarter.
Chelsea Cai, Head of Research for JLL Tianjin, commented that "in a bid to cool the housing market, several main cities have announced policies to support the leasing market; the Tianjin Government is expected to follow soon". We forecast both demand and supply will slow, following the introduction of the potential policy changes. Capital values of high-end housing will likely stop rising from 3Q17 and are forecast to remain stable by end-2017.
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