China’s retail property market to be robust in 4Q11

Retail property market exploding in China

JLL expects demand for retail space to be huge, as 75m households are expected to join the “middle class” by 2015, which will lead to a substantial boost in consumer spending, according to a McKinsey report published in 2009. In the near term, JLL believes retail sales will jump in 4Q11 due mainly to the cut in individual income tax in Sept-11, while consumers’ balance sheet utilization could be the next source of long-term growth.

Despite the huge supply boom where 210 new shopping malls are estimated to be completed in 2012, JLL believes the impact on physical market rent will be immaterial. It further points out that supply will be more rational when viewed from the perspective of the large catchment areas of provincial capitals such as Chengdu — the provincial city of Sichuan province and the financial centre and commercial hub of the Western China.

Big divergence in Grade A office supply in Tier 1-2 cities. JLL estimates new CBDs will pop up all over Tier 2-3 cities, while Grade A stock will remain limited in Tier-1 cities. Despite the new supply, JLL expects office demand to remain firm given that more than 50% of the office space has been taken up by an owner occupier. JLL further notes that China is among the top-three priorities for 65% of companies for sourcing investment opportunities, based on a survey conducted by American Chamber.

Overseas investors continue to be a big fan of Shanghai. JLL reported that Shanghai shared 45% of overall large-scale real estate transactions in China in 1H11, substantially higher than <30% recorded from 2005-09. On the rental level front, JLL forecasts overall premium Grade A office rent to be RMB9.6/sq m/day in 2Q11, up 4.8% q-o-q and 18.7% y-o-y, but still 19.1% below the peak level seen in 2Q08.