Construction & Property Focus Group Quarterly Update – Q1&Q2 2017

Published on 2017-06-07

Compared to nine months ago the construction market demand is slowly increasing. The property sector in China got off to a strong start in 2017 with macro fundamentals supporting the viewpoint of continued growth.

Construction:

Compared to nine months ago the market demand is slowly increasing, however manufacturing clients are still conservative in their investments and moving towards reductions in size and scope, with a focus on internal space utilisation rather than expansion. Many foreign investors are also hesitating in moving forward with their projects and we see many projects delayed. The ‘go west’ policy has not visibly affected project distribution, the majority of which remains mostly in the Eastern provinces of China.

Many companies expanding within China have much more mature understanding of construction practices in the local market, therefore project management (PM) service providers are becoming more specific to various technical areas rather than a whole project management approach. The PM service sector also continues grow with some local players, such as licensed design institutes (LDIs), expanding their business to provide PM  services

Property:

The property sector in China got off to a strong start in 2017 with macro fundamentals supporting the viewpoint of continued growth. Real estate investment increased by 9.1% in the first three months of the year compared to the same period the previous year, while the residential sector also recorded strong sales volumes growth, up 20% YoY, and residential price growth accelerated in March to 0.71% month-on-month. Major developers continued to consolidate their position in the market, accounting for 42% of all residential sales in the first three months, up from just 25.5% in 2016 according to analysis by BOAML.

The Shanghai Grade A office market received a significant addition of new supply, in what could prove to be a record supply year for the city. Despite relatively strong demand, especially in more decentralised locations, vacancy rates edged up to 9.0%, with rents continuing to soften and landlords, especially in the Puxi market, becoming more accommodative in lease negotiations as the market increasingly favours the tenant. This trend is likely to persist for the coming two years, if not longer, until supply levels start to abate and new demand helps to absorb vacant stock.

The retail market continues to be faced with weaker retail sales growth rates than the market is used to, excess new supply often of questionable quality and positioning, and competition from online players. However, the first quarter saw no new supply added to the market, allowing vacancy rates to fall to 6.3% in prime retail areas and 9.3% in non-prime locations. A weakening of the RMB, increasing tourism levels and the growth in kids, sports and start-up F&B & entertainment establishments continue to offer a glimmer of hope for the sector.

The residential sector has been subject to a range of different restrictive policies over the last few months, including tightened lending criteria and suspension of commercial titled apartments. Despite these restrictions, unsold inventory levels continued to fall to their lowest levels in over five years (6.2 million sq m) as only one million sq m of new supply entered the first hand market, while transaction volumes reached 1.5 million sq m. House prices also remained relatively firm, with average transaction prices in the city reaching RMB47,400 sq m and high-end pricing approaching RMB100,000 per sq m. Activity is expected to remain subdued in the coming 12 months, but sustained strong demand from end users and upgraders is likely to continue to support pricing.

The investment market remained active with nine sizeable deals concluded, with the total consideration reaching RMB13.5 bn. Investors remained active in the office sectors, though other sectors continue to garner interest. Yields continued to compress in most asset classes as the weight of capital continued to push up property values, while weaker fundamentals and excess supply continued to weigh on rents. Continued cross border capital controls are only likely to exacerbate this situation further.

Learn more about the Construction & Property Focus Group>>