Shenzhen has potential
With higher capital values and lower rentals, the office market in Shenzhen offers a lower yield than in Beijing and Shanghai. However, it still offers great potential from the angle of asset appreciation, according to Martin Chiu, managing director of CB Richard Ellis' (CBRE) Shenzhen office.
He says capital values of office property are projected to rise because demand exceeds supply. 'Much of the strata-titled office space is retained for self-use by landlords, and owners are reluctant to sell in the secondary market,' he says. Strata-title real estate is a form of ownership where the landlord owns an individual unit, plus a share of the common areas.
According to Chiu, most investors in Shenzhen buy office space for self-use and private investors have turned the focus to buy office property under the shadow of administrative restrictions in the residential sector.
He says developers enjoyed a short period for their investments to pay off when Shenzhen investors were very active, and it only took a short time for them to recycle their investments by selling office developments on a strata-titled basis. But lately, single-owned office schemes have been appearing on the market and more are expected to be available to lease, such as Century Place and Kingkey 100. Office buildings are being withdrawn from the strata-title sales market and shifted to the pre-leasing sector, such as Excellence Century Center. There are also developers who have decided to maintain ownership of part of their assets, while selling the others. With the land shortage in downtown Shenzhen, Chiu believes developers, who are not struggling for capital, tend to hang on to office properties. These quality assets can assure stable rental income in the long-term and potential premiums on asset appreciation to the landlord, while helping to boost the company profile.
He believes Shenzhen's office market shows promise in the long run, with its expansion driven by the city's favourable economic environment and the accelerated development of a modern service industry, such as finance, trade and logistics, and hi-tech industries.
Meanwhile, data from CBRE research indicates a rise of 21.4 per cent in prime office market rentals in the first quarter this year. Rental growth is mainly fuelled by robust market demand, especially from financial institutions.
Several high-quality office projects - such as NEO Tower A, Kingkey 100, Kerry Plaza Phase 2 and Century Place - are scheduled to be completed in the coming year, with more than 400,000 square metres of office space added to the market stock. The large supply of quality office space is expected to push up the vacancy rate, while average rental and capital values remain buoyant because of strong demand.