Tier-2 Chinese cities facing glut of office space
Huge increase in supply likely to put developers under pricing pressure
The rapid development of new central business districts (CBDs) by local governments on the mainland will result in the real estate market being flooded with a huge volume of new commercial properties in the next four years, says international property consultant CBRE.
In second-tier cities such as Tianjin, Shenyang and Chongqing, the stock of office space will more than triple between 2013 and 2016, according to a research report released by CBRE yesterday.
Its research data shows that new office completions in 14 major cities such as Beijing, Shanghai, Guangzhou and Shenzhen are expected to total 40.8 million square metres during the four-year period. That could potentially result in an 80 per cent increase in total office space stock over the period.
Developers of office buildings in new CBDs, which are expected to account for 53 per cent of the total new supply due for completion during the period, would face headwinds, it said.
CBRE attributes the sharp increase in new office supply to local governments' development of CBDs in an attempt to increase land premium income.
"Almost every major city in China is developing or planning a new CBD, and this has been the key factor in driving up land prices in newly developed areas," CBRE's report said. "Local governments are strongly motivated to facilitate the development of new CBDs as land premiums are an important source of income."
Tianjin, for instance - which according to CBRE Research analysis takes longest to absorb future office supply - will see more than 70 per cent of its future supply come from its new CBDs in Binhai New District, mostly from Xiangluowan and Yujiapu.
CBRE research recommends that local governments rationalise land supply and speed up investment in infrastructure and supporting facilities in their new CBDs.
It said tier-1 cities such as Beijing would see a limited supply of office space in coming years.
But in Shanghai, according to Knight Frank, another property consultant, new grade A office supply will reach more than 2.5 million sq metres in the coming three years, equivalent to 40 per cent of the existing grade A office stock in Shanghai.
In a market with such an abundant future supply of space, Knight Frank predicts that tenants will gain a stronger position in office leasing negotiations.