Asia real estate market update November 2021

Hong Kong Office

Central leasing activity picks up – Some financial companies are taking advantage of falling rents to expand in Central. Schonfeld Strategic Advisors, a hedge fund, is relocating from 8,000 sq ft in Man Yee Building to 15,000 sq ft at Chater House for a monthly rent of HK$130 per sq ft; and Lombard Odier will take an 11,000 sq ft floor at Three Exchange Square for around HK$120 per sq ft per month. However, in the most notable leasing transaction of the month, Nike will downsize from 78,000 sq ft in Exchange Tower, Kowloon Bay, to 54,000 sq ft at International Trade Centre in Kwun Tong, where they will pay HK$32 per sq ft.

Henderson Land won the prime harbourfront commercial Site 3 in Central with a record bid of HK$50.8 billion (A.V. of HK$31,434 per sq ft). The development is expected to become an iconic landmark in the city, with 1.6 million square feet of commercial space (660,000 sq ft of offices and 940,000 sq ft retail) and 340,000 sq ft of community areas. It will be completed in two phases in 2027 and 2032.

Hong Kong Retail

Investors trade retail podiums – Retailers are active in Central despite ongoing travel restrictions and absence of inbound tourists. Under Armour leased 3,900 sq ft at Manning House for HK$800,000 per month, while jewellery retailer Chow Tai Fook took an additional 1,098 sq ft at China Building for HK$500,000 per month. China Construction Bank leased 7,633 sq ft on three floors of 238 Des Voeux Road Central in Sheung Wan for HK$270,000 a month.

A local investor sold the retail podium of H Cube in Tsuen Wan for HK$143 million (HK$15,300 per sq ft, 4.0% net initial yield). Kerry Properties sold a podium at Island Crest in Sai Ying Pun for HK$350 million (HK$22,000 per sq ft and 2.4%); and New World Development sold shops at Mei Foo Sun Cheun in Lai Chi Kok for HK$455 million (HK$5,335 per sq ft / 3.7%) to a group of local investors.

Hong Kong Residential

Buying frenzy continues – Buyers continue to snap up new flats, especially smaller units with lower lump sums. Centralcon Properties’ The Arles in Shatin sold 662 out of 874 units on offer, while Tai Hung Fai’s ARTIQUE in Sheung Shui sold all 30 units released. Manor Hill in Tseung Kwan O, by Kowloon Development, sold 325 out of 438 units on its launch day.

Lai Sun Development won the tender for a residential site at Broadcast Drive, Kowloon Tong for HK$1.6 billion (A.V. of HK$22,464 per sq ft); and Peterson Group acquired a site on Tai Hang Road in Wan Chai for HK$1.2 billion (HK$69,000 per sq ft) for redevelopment of low-density luxury flats.


Singapore Office

Mixed leasing performance – Despite Singapore’s strong vaccination rate and gradual lifting of border restrictions, the URA’s office rental index fell 3.5% q-o-q in 3Q, reversing the 1.3% rise in 2Q.

Currently, some tenants are taking advantage of the soft leasing conditions to undertake a flight-to-quality from older properties to better buildings in the CBD (defined by URA as Category 1). Owners of such buildings generally have deeper pockets and can provide attractive non-rental incentives to retain tenants or secure new ones. The median rent of Category 1 office buildings therefore increased 2.6% in 3Q. On the other hand, owners of Category 2 offices (all other buildings) tend to lack the financial strength to offer tenants fit-out expenses or extended rent-free periods and may negotiate purely on rental to support occupancy. Hence, the median rent for Category 2 buildings fell by 1.7% in 3Q.

Singapore Retail

Sales rose in September – Retail sales rose 6.6% y-o-y in September, reversing the 2.8% y-o-y dip in August. Computers and telecommunications surged 66% due to new product launches during the month, with over 53% of these sales transacted online. Overall, retail sales remained below pre-pandemic levels, at S$3.4 billion, with a total online component of 15.2%.

F&B sales grew 4.4% y-o-y in September compared to a 6.7% y-o-y decline in August. Of the S$669 million F&B turnover recorded, 34% was from online.

Singapore Residential

Active leasing market – Non-landed home rentals rose 1.3% m-o-m and 9.1% y-o-y in October, as demand increased due to increasing numbers of returning Singaporeans, permanent residents and foreigners. Rents remain 9.1% below the peak of January 2013. Total leasing volume increased 10% m-o-m in October, with 4,651 new leases signed, compared with 4,225 leases the previous month. Breaking this down by region, 36.5% of total leasing volume was from OCR, 32.9% from RCR and 30.6% from CCR.


Shanghai Office

Growing demand for Qiantan – The decentralized market of Qiantan continues to successfully challenge traditional CBDs for tenants and has seen its vacancy rate fall to just 5.2% in 3Q, the lowest since 2017 when its first Grade A project was launched. Domestic firms proved active in taking up office space, accounting for 84% of leasing transactions recorded in the first three quarters of 2021, up from 51% in 2020. Despite strong recovery in take up, rental growth is still limited given the ample supply across the city.

The media and entertainment sector, growing on the back of an increasingly affluent populace that is willing to pay for experiences, accounted for 23% of leasing transactions recorded in the first three quarters, up from 3% in 2020. Notable transactions included Bilibili leasing 10,000 sqm in Guohua Plaza in Yangpu, after having previously taken 4,700 sqm in Innov Centre.

Shanghai Retail

F&B take-up – Shopping mall vacancy rates remained unchanged in 3Q at 9.1%. Demand from F&B tenants accounted for 32% of newly leased space in 3Q, up 6% q-o-q. Innovative Chinese-style F&B brands were increasingly active, especially Chinese dessert and tea houses that offer customers an alternative to cafes. For example, Changsha-based Tiger Attitude, a Chinese-style bakery chain which just raised US$50 million in its Series A financing round, opened its sixth store in Shanghai, just two months after its first.

On the investment front, a subsidiary of Lujiazui Group acquired five Lujiazui waterfront lots in November, for RMB 15 billion (RMB 40,945/sqm on 367,545 sqm of buildable GFA). The project will comprise 34% of retail, 34% residential, 24% office and 7% of cultural space. As the site involves a landmark dockyard that was historically occupied by Taikoo, and given Lujiazui-Swire’s previous collaboration on Taikoo-Li Qiantan, the market is expecting that Lujiazui will team up with Swire on this project again.

Shanghai Industrial

Industrial clusters took shape – Third quarter leasing activities pushed the average rental rate for core business parks up 0.1% q-o-q, to reach 4.5/day/sqm. In terms of leasing, industrial clusters took shape among different business park areas. According to CBRE, gaming companies favoured Caohejing, e-commerce and live-streaming tenants rooted for Linkong and Jinqiao, whilst cloud computing and blockchain firms focused on Zhangjiang and Shibei.


The effects of stresses in Chinese residential developers on the real estate market

Chinese developers under financial stress – The Evergrande crisis, with its defaults and potential bankruptcy, is still being played out. Evergrande is the world’s most indebted real estate developer, with liabilities close to RMB2 trillion (approx. US$305 billion1), plus undisclosed amounts of off-balance sheet financing. It is believed that all 23 outstanding bonds2 have a cross-default clause, however if one of these bond defaults, that does not necessarily mean bankruptcy for the company. Other large Chinese developers, including Fantasia and Kaisa, are struggling to make their bond payments and may default, sparking fears of a spill-over affecting the global financial system.

These and other over-leveraged companies were exposed by the “three red lines” regulation introduced in August 20203 to contain the debt binge of Chinese developers. The debt metrics that developers must now meet in order to borrow include i) 70% ceiling on the ratio of liabilities-to-assets; ii) 100% cap on net-gearing ratio; and iii) cash-to-short-term-debt ratio of more than 1x. A developer’s access to new debt is restricted if they fail one or more of these tests.

Risk of contagion – This is a singular distress caused by a liquidity crunch exposed by the “three red lines” and other regulations, such as the two-way pricing limits and lower mortgage lending by banks, in support of the Chinese Government’s policy of “housing to live without speculation”, According to People’s Bank of China, real estate related loans account for c.27% of the overall banking system, with loans to private developers at 4% of the total. The government is actively intervening in the situation, evidenced by the centralisation of related legal proceedings across different regions and provinces and the involvement of local governments to ensure completion of construction and delivery of the c.800 residential projects in the pipeline. The priority is to ensure the timely delivery of residential units that were already pre-sold to end-users, followed by stabilising the supply chain to sustain developers’ operations.

The bond market appears to be pricing in a 35-40% chance of default across property credits in the next 12 months. There has been some recent easing of mortgage regulations, M&A, and interbank bond channel rules, which may not help the distressed developers but should support the overall sector. So far, impacts on the broader economy and financial system have been manageable. Although further defaults and bankruptcies may be expected, the risk of contagion to the financial system is expected to be limited.

Impact on commercial real estate markets – The fundamentals supporting real estate values remain solid in China and problems in the residential sector need not imply long term reductions in commercial property values. On the ground, we see banks are still generally open to new lending and refinancing of existing assets, with terms and pricing at similar levels to six months ago. We are seeing some near-term selling of investment assets by indebted developers to raise capital, and there may be some reappraisal of the appropriate risk premium for Chinese real estate assets, causing cap rates to rise, but in terms of the wider Asia Pacific property markets, we believe the current crisis should be transient and largely confined to China’s residential sector. Strong forces continue to underpin investment activities across the Asia Pacific region.

1SCMP, 8 Oct 2021, “Evergrande has not engaged with offshore bondholders since payment miss, holders’ advisers say”
2The Asset, 11 Nov 2021, “Evergrande has defaulted, investor says”
3SCMP, 30 Aug 2021, “Chinese developers to focus on debt reduction until 2023 to meet ‘three red lines’ deadline”


The information in this market update is current as at November 2021 and does not necessarily reflect subsequent market events and conditions. This market briefing is provided for information purposes only and articles do not provide individual financial, legal, tax or investment advice. Past performance is not indicative of future performance. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance. The statements and statistics contained herein are based on material believed to be reliable but are not guaranteed to be accurate or complete. Investments strategies should be evaluated relative to each individual’s objective in consultation with their legal, investment and/or tax advisor. Schroders capital is not liable for any errors or omissions in the information or for any loss or damaged suffered.

 

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