- The U.S.-China trade conflict will continue to weigh on the business outlook in Greater China in 2019. However, new infrastructure development will drive the formation of strategic hubs and counterbalance much of the downside risk. Investment demand is expected to remain solid, while the deployment of new technologies into different sectors could stimulate new commercial leasing demand, particularly from technology companies. Below are the key property sector trends CBRE Research expects to see in Greater China in 2019.
- Office: U.S.–China trade conflict and the ensuing economic uncertainty are set to dent office demand in mainland China and Hong Kong. Leasing momentum in Taiwan will be less affected. Office rents will likely soften in oversupplied and trade and manufacturing-driven cities in 2019.
- Retail: The amalgamation of online and offline will continue to drive the evolution of retail demand on the mainland. Retailers in Hong Kong and Taiwan will adopt a conservative approach towards expansion due to the diminishing wealth effect. Retail rents are projected to stay flat or grow slightly in most markets across Greater China.
- Logistics: Tight land and warehouse supply will translate into steady logistics rental growth in the Greater Bay Area, Yangtze River Delta and Pan-Beijing area. Risks include potential weaker leasing demand stemming from the U.S.-China trade conflict and the gradual migration to self-built warehouses by major e-commerce companies.
- Capital Markets: Domestic and foreign investors will continue to seek opportunities in mainland China, supported by the improving funding environment. End-users and longer-term investors will remain active in Hong Kong, while reshoring by Taiwanese manufacturers is expected to benefit the local industrial property market. Yields will likely expand slightly in 2019 as capital values adjust to growing economic risks.
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Economy
Market Headwinds Strengthen
Economic headwinds strengthened in 2018 amid deleveraging, supply-side reform and U.S.-China trade conflict. GDP growth weakened to 6.4 % in Q4 2018, the lowest rate of growth since Q2 2009.
Economy
Economic headwinds strengthened over the course of 2018 amid deleveraging, supply-side reform and U.S.-China trade conflict. China’s economy grew 6.6% in 2018; however, y-o-y growth rates declined gradually. GDP growth weakened to 6.4 % in Q4 2018, the lowest rate of growth since Q2 2009. Economic data published in December indicated slower export, manufacturing, consumption, real estate investment and sales growth. CBRE forecasts that China's economy will grow by 6.1% in 2019.
Figure 1: Real GDP Growth Forecast

Source: Wind, CBRE Research, January 2019
TRADE CONFLICT WEIGHS ON ECONOMY
As of January 2019, China remains mired in a protracted trade dispute with the U.S., with no resolution in sight. Although signs of detente have emerged, with a 90-day truce announced at the G20 meeting in Argentina in early December, the rivalry with the U.S. will continue to impact China’s economy in 2019 and beyond. These trends, together with the surge in exports in H1 2018 before the first wave of U.S. tariffs took effect, mean that net exports will drag on economic growth after the trade surplus decreases.
The new export order index of the official Purchasing Managers' Index (PMI) has remained below the 50% threshold since June 2018, indicating contraction. The profit growth rate of industrial enterprises has declined amid falling commodity prices and weakening domestic and foreign demand. In 2019, manufacturing growth and investment will be led by high-tech manufacturing and emerging industries such as information technology, biology and equipment manufacturing, reflecting the direction of supply-side reform and industrial transformation and upgrading.
Figure 2: Manufacturing PMI, Infrastructure Construction Investment And Total Retail Sales

Source: NBS, CBRE Research, January 2019
DOMESTIC CONSUMPTION GROWTH TO STABILISE
Domestic consumption growth slowed significantly in 2018 amid lower income expectations and the sharp decline in car consumption following the cancellation of the vehicle purchase tax discount. Between January and December, the cumulative growth rate of total retail sales decreased by 1.2 percentage points to 9.0 % from the same period in 2017, the lowest since 2002. However, the increase in the personal tax threshold and additional deductible items should ensure the decline in consumption growth stabilises in 2019. Fiscal policy will be strengthened this year and the deficit ratio is expected to be closer to 3%. The effect of personal income tax cuts will be fully rolled out while the VAT rate is expected to be lowered further.
Infrastructure construction will be another key pillar of fiscal policy in 2019. Although growth in infrastructure investment declined in H1 2018, it showed signs of recovery towards the end of the year and is expected to rebound in 2019. In addition to rural revitalisation and regional integration initiatives such as those in The Greater Bay Area, the Yangtze River Delta and Beijing-Tianjin-Hebei, investment in new infrastructure, including artificial intelligence and Internet of Things, will also be strengthened.
STEADY MONETARY GROWTH EXPECTED
Monetary policy in 2019 will be characterised by steady growth, moderate tightness and reasonable and sufficient liquidity. Strong monetary stimulus is highly unlikely, with M2 money supply and social financing expected to increase slowly from 2018. In addition to quantitative tools such as standard reductions, medium-term lending facilities (MLF) and reverse repurchasing, the People's Bank of China (PBoC) may consider cutting interest rates. Other support will come from the Targeted Medium Term Loan Facility, announced by the PBoC in December 2018, which offers an interest rate of 3.15%, 15 basis points lower than MLF. The facility is intended for use by large banks with the potential to further increase loans to small, micro, and private enterprises.
External constraints on domestic monetary policy easing will continue to exist in 2019 but are expected to weaken gradually. In December 2018, the U.S. Federal Reserve raised its interest rate target range by 25 basis points to 2.25 % - 2.5 %, the fourth increase in 2018. Two rate increases are expected this year, a lower number than had originally been anticipated, meaning that Chinese monetary policy will have more room for adjustment in 2019. Nevertheless, the current misalignment of economic cycles in the U.S. and China and the divergence of monetary policy will exert some pressure on the RMB exchange rate in 2019. Although the implied devaluation of the RMB NDF over the next 12 month is estimated to be less than 1%, the negative impact of the trade conflict on the trade surplus and the current account surplus may further weigh on the Chinese currency over the course of 2019. The threat to foreign exchange reserves posed by the expectation of further depreciation and the reduced surplus will ensure the government keeps existing capital controls in place.
REAL ESTATE POLICY SETTINGS TO LOOSEN
CBRE expects to see the relaxation of real estate policy settings in 2019. Although the government maintains its principle of "housing without speculation", implementation is expected to become more flexible this year. Several cities have already partially eased curbing measures such as sales restrictions, price limits and purchase limitations, while commercial banks have lowered mortgage interest rates. Tier III and tier IV cities, many of which have a large volume of unsold inventory, may further loosen policies this year.
The financing environment for developers is expected to slightly improve in 2019 but will be constrained by moderately tight monetary policy. Small and medium-sized developers may find it challenging to generate cash flow under the dual pressures of slowing sales and debt maturity. Further mergers and acquisitions are anticipated.
December 2018 marked the 40th anniversary of the launch of China's economic reforms, referred to in the West as “the opening of China”. Reforms in 2019 will focus on industrial upgrading, regional integration and institutional innovation, all of which should improve the economy’s resilience to internal and external challenges. Key initiatives will include the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), the launch of a science and technology innovation board on the Shanghai Stock Exchange, and the further opening of the medical and educational fields.
Contacts
Sam Xie
Head of Research, China
[email protected]
Office Sector
Trade Dispute Impact Grows
Strong TMT subsector demand and continued expansion by coworking operators are expected to support leasing activity this year.
Office Sector
Despite steady expansion by TMT and coworking tenants, new office leasing demand declined by 12% y-o-y to 5.4 million sq. m. in 2018 due to moderating economic growth and the collapse of the peer-to-peer (P2P) lending industry. Slower economic growth and U.S.-China trade friction will continue to cloud corporate decision-making in China this year. CBRE estimates that the new office demand in the 17 monitored cities will decline to 5.3 million sq. m. in 2019.
TRADE CONFLICT TO IMPACT DEMAND
Apart from a few trading companies scaling back their office footprint in Guangzhou and Ningbo, the effects of the U.S.-China trade dispute were not discernable for the bulk of 2018. However, market sentiment began to deteriorate towards the end of the year, with net absorption data indicating that new office demand fell substantially in coastal cities, which are reliant on trade. However, demand in inner cities remained stable. CBRE expects the trade dispute to exert a stronger impact on office leasing demand in 2019 as affected corporate decisions gradually filter through to the market, with an estimated 10% of the existing occupied space directly affected.
Figure 3: Office Net Absorption (Four-quarter Moving Average)

Note: Port cities are Dalian, Tianjin, Qingdao, Ningbo, Shanghai, Guangzhou and Shenzhen; Coastal cities are Beijing, Wuxi, Nanjing, Suzhou, Hangzhou; Inland cities are Wuhan, Changsha, Chengdu, Chongqing.
Source: CBRE Research, January 2019
TMT EXPANSION EXPECTED TO SLOW
While the TMT sector continued to expand rapidly in 2018, stagnant financial, hiring and industrial statistics point to slower growth this year. Venture capital investment in the TMT sector fell on an annual basis in H1 2018, the first decline on record, due to a range of headwinds including financial deleveraging and the tighter regulation of the digital gaming industry. Although China’s active mobile internet users now exceed 1.1 billion, growth in the user base is weakening, with just 20 million new users added in 2018. These factors point to the slower growth of the TMT sector this year, with zhaopin.com data showing that TMT sector hiring began to decline from Q2 2018.
Figure 4: Investment and Recruitment in TMT Sector

Source: PWC, Zhaopin.com, CBRE Research, January 2019
However, the deployment of new technologies such as artificial intelligence, cloud computing and Internet of Things into the financial services, manufacturing, retail, healthcare, education, and transportation sectors, particularly in the business-to-business industry, may stimulate new demand. Other demand will originate from fragmented subsectors such as mobile video and online reading.
SLOWER COWORKING EXPANSION
The nine leading coworking platforms added more than 100,000 desks in 125 new locations in seven major cities in 2018, significant growth on 2017. The rapid pace of expansion has resulted in some consolidation within the industry, with six M&A deals announced in 2018 compared to just two in 2017. Capital continues to pour into the leading providers, with the top five brands receiving a total of RMB 9.5 billion of funding in 2018, accounting for over 90% of total investment in the sector.
Expansion by coworking operators is expected to slow in 2019. A recent survey by CBRE found that although leading platforms plan to add new centres in tier I and tier II cities, 40% of respondents intend to moderate their expansion in Beijing and Shanghai. Moreover, landlords become more willing to engage in profit-sharing deals and offer operators CAPEX subsidies. Nevertheless, coworking operators retain strong demand for prime offices, ensuring they will remain a key driver of office leasing activity.
CBRE data show that coworking space operators prefer core areas (81%) and office buildings (76%) to facilitate their strategy of attracting large and middle sized corporate occupiers. The impact of slower expansion on overall office demand will therefore not weaken significantly.
Figure 5: Drivers of Leasing Coworking Space

Source: CBRE Research, January 2019
TMT tenants accounted for 50% of leasing transactions in coworking centres in 2018, while the financial sector had the largest number of desks per lease. 74% of surveyed businesses leased coworking space for short term purposes, primarily to balance the need for business development and the flexibility of working location. Coworking’s appeal as a solution for start-ups and unproven businesses could strengthen this year as economic uncertainty rises. 20% of surveyed businesses already utilise coworking as a long-term workplace strategy for core business units. However, large and medium sized companies retain concerns about coworking’s capacity to provide adequate information security and an environment in which they can maintain their corporate culture and identity.
NEW MEASURES RAISE FDI LIMITS
In July 2018, authorities promulgated new special administrative measures to improve access to foreign investment. The measures raised the foreign investment limit for securities brokerages, futures companies and life insurers to 51%.
CBRE expects the reforms to support the growth of office leasing demand from overseas companies. The cancellation of foreign ownership caps in new energy vehicle manufacturers has already seen Tesla announce plans to construct its first plant outside the U.S, while BMW intends to step up its investment in China.
The reforms are also set to stimulate new demand from domestic companies, with the Bank of Communications and Bank of China both recently obtaining approval to launch new wealth management units, and a further 24 banks reportedly planning to open similar functions. The expansion of banks’ wealth management businesses will drive new leasing demand in leading financial cities such as Beijing, Shanghai and Shenzhen.
NEW STOCK TO RISE 30% THIS YEAR
New office supply in 17 cities monitored by CBRE is forecasted to increase by 30% y-o-y to 10 million sq. m. in 2019. New stock in Shanghai will again exceed 1 million sq. m., while project delivery will pick up significantly in Beijing, Guangzhou, Tianjin, Chengdu and Chongqing. However, after considering the supply slippage ratio, which stood above 30% in 2018, actual new office supply in 2019 will be around 7.5 million sq. m.
New stock in core areas will account for around 55% of total supply, a significant increase on 2018. This year will see the completion of projects in prime submarkets including the Beijing CBD, Zhujiang New City in Guangzhou, and Futian in Shenzhen, and will provide ample opportunities for occupiers to expand in core areas. However, emerging areas, especially those with poor transportation and business infrastructure, may come under pressure.
AVERAGE VACANCY RATE TO EXCEED 20%
Slower economic growth and ample new supply will ensure the average vacancy rate in the 17 cities monitored by CBRE exceeds 20% in 2019. Vacancy will rise in 15 of these cities on a y-o-y basis, led by Tianjin, where vacancy is expected to approach 50% on the back of new supply in the Binhai New Area. Wuhan, Changsha and Qingdao will also see record high vacancy rates. Guangzhou and Nanjing will be the only two markets in which vacancy will remain in the single digits.
Figure 6: Office Vacancy Rate Forecast for 17 Major Cities

Source: CBRE Research, January 2019
HIGH VACANCY LIMITS RENTAL GROWTH
Rental performance will diverge in 2019. In Beijing, new supply in core areas will provide new options for tenants, boost vacancy and compress rents for older properties. Shanghai is expected to see intense competition for high profile tenants, which will exert downward pressure on rental growth in emerging areas.
In Shenzhen, strong upgrading demand from financial services companies will push up rents for space in prime areas, while rents in emerging locations may struggle under the impact of new supply. Although Guangzhou remains a landlord’s market, with rental growth of 10.7% y-o-y in 2018, gains in 2019 will be weaker due to new supply and occupier movement to emerging areas.
Figure 7: 2019 Office Rental Forecast for 17 Major Cities

Source: CBRE Research, January 2019
Average rents in tier II cities are forecast to decline by 1.1% amid continued high vacancy, which will edge up further towards 30% in 2019. Rents in northern and central tier II cities are expected to fall at a faster rate, while the recovery in Chengdu will slow significantly as new stock comes on stream. Tier II markets in east China will remain stable, with Nanjing leading the rental growth amongst all Tier II markets while Hangzhou, and Suzhou expected to register slight rental growth.
Contacts
Virginia Huang
Managing Director
Advisory & Transaction Services, Greater China
[email protected]
Sam Xie
Head of Research, China
[email protected]
Retail Sector
Integration and Innovation
Integration and innovation are set to remain key themes in 2019 as the adoption of new technology drives the further amalgamation of offline and online retail.
Retail Sector
Although 2018 saw high levels of market volatility and uncertainty arising from U.S.-China trade friction, these conditions further enhanced the role of domestic consumption in driving the overall economy. Total retail sales reached RMB 38 trillion in 2018, up 9% y-o-y. The government's use of domestic demand elasticity is expected to stabilise the economy and reduce external shocks in 2019. Successive individual income tax reforms are expected to further boost the consumer market, with retail sales expected to maintain a growth rate of around 9%.
E-COMMERCE GROWTH DECLINE
The growth of online retail is slowing following years of expansion. The number of online shoppers increased by 6.8% y-o-y in 2018 and is set to weaken further this year, marking a new low. The slowdown in new users has directly affected online traffic and transactions and resulted in slower online retail sales growth.
Costs are also rising rapidly. Data show that mainstream e-commerce platforms spent RMB 300 per person to acquire new customers in 2016/2017, a tenfold increase on 2014/2015. Slower growth in online consumption and the rising cost of operations are squeezing profit margins and forcing e-retailers to focus on offline expansion.
Figure 8: Online Retail Sales Growth (2014-2018)

Source: NBS, 100EC, CBRE Research, January 2019
GROWTH IN OMNICHANNEL SUPERMARKETS
One key driver of retail leasing demand this year will be omnichannel supermarkets. New store openings in this category increased from 44 in 2017 to 137 in 2018. Although tier I cities remain the main focus, with 59 new stores opened in 2018, the number of new stores in tier II and III cities is also rising rapidly. Stores in this category attract foot traffic and optimise their operations by constantly introducing new technologies. Data show that a stabilised omnichannel supermarkets can generate the revenue almost five times greater than traditional supermarkets.
Figure 9: Fresh Supermarket Accelerated Expansion (2016-2018)

Source: CBRE Research, January 2019.
The strong sales performance and ability to attract customers through new technology has solidified omnichannel supermarkets’ status as highly prized tenants. Over 70% of new openings in 2018 were in shopping malls or department stores. The format is also keenly sought after as an anchor tenant for projects undergoing renovation.
COFFEE AND TEA OUTLETS GROW RAPIDLY
Venture capital continues to be the driving force behind the wave of offline expansion by online stores. CBRE data show that the number of transactions involving series C or more funding rounds doubled on a y-o-y basis in 2018, while transactions relating to setting-up offline stores increased from 87 in 2017 to 93 in 2018. The inflow of investment will continue to drive growth in the number of bricks-and-mortar stores being set up by online brands.
Figure 10: Investment Transactions by Venture Capital in Retail Sector

Source: CBRE Research, January 2019.
Coffee shops and tea retailers continued to expand rapidly in 2018, supported by significant venture capital funding. HEYTEA increased its number of stores by nearly 30% in 2018, extending its footprint to 17 cities from 13 in 2017. Naixue Tea also doubled its number of new stores while expanding its city coverage from 9 to 25. While their focus remains on tier I cities, many retailers in this category are eyeing expansion in tier II markets such as Hangzhou, Nanjing, Suzhou, Chengdu, Chongqing, Wuhan, Changsha and Xi'an. Other key trends in this sector will include the introduction of more sub-brands.
F&B GOES OMNICHANNEL
The domestic catering market has maintained relatively steady growth in recent years, led by takeout delivery services. As this sector expands, operators who have built their businesses on takeaway services are pivoting from take-out to dine-in, and from efficiency to quality service.
Examples include smart food services provider Meiweibuyongdeng, which recently launched China’s first shared kitchenless restaurant in Shanghai SML Mall. The 400 sq. m space uses an app enabling consumers to purchase food from 10 nearby restaurants for consumption on the premises.
Figure 11: Annual Sales Growth Of F&B And Takeaways (2015-2019)

Source: CBRE Research, January 2019.
Traditional restaurants are also embracing the digital revolution. McDonald's plans to open 2,000 new stores by 2022, 90% of which will be McDonald's 2.0 stores and 75% of which will provide take-out delivery services. Several other traditional F&B brands are exploring this “physical outlet + take-out delivery” model, which has been proven to result in higher revenue and increased efficiency rates. CBRE advises omnichannel F&B brands to carefully consider site criteria when setting up new stores, especially the physical distance between the location and its target customers.
NEW SUPPLY REMAINS SIGNIFICANT
New retail supply in China’s 17 major cities is forecast to total 7.6 million sq. m. in 2019, although some new projects may be delayed to 2020. Nearly 60% of new retail area is operated by experienced developers, somewhat higher than it was in 2018 (57%). The average opening rate of new projects in 2018 reached 88.6%, which is expected to remain similar or slightly higher in 2019.
Figure 12: China Retail Property Market Supply and Demand Forecast

Source: CBRE Research, January 2019.
Around 700,000 sq. m. of retail space in these 17 cities was shuttered in 2018, while increasing vacancy rates in several malls may ultimately lead to further closures. However, some renovated projects reopened in 2018 with high quality tenants and very little vacancy. These included Shanghai Shimao Shopping Plaza, Changfeng Joy City and Beijing Fangshan Paradise Walk.
CHONGQING LEADS SUPPLY RISK
We adjust down the oversupply risk during 2019-2021 for Suzhou and Wuxi. Suzhou remains a popular market for expansion by retailers in East China and Wuxi will benefit from successful adjustment of a few prime malls. Supply risk will be high in Chongqing, where around 900,000 sq. m. of new supply is due for completion in what is already a fiercely competitive and challenging market.
RENTS POISED FOR STEADY GROWTH
CBRE expects ground floor rents of shopping malls in China’s 17 major cities to record steady growth of between 0%-3% in 2019. Just two cities, Qingdao and Chongqing, will experience a rental decline, largely due to oversupply and retail sales conditions in traditional CBDs.
Figure 13: 2019 China Shopping Mall G/F Rental Forecast

Source: CBRE Research, January 2019.
Operational expertise will continue to play a key role in generating rental income. Data show that the rental income of shopping malls operated by major listed shopping mall developers recorded double digital y-o-y growth of 14.3% in H1 2018. Rental income rose by 11.5%, 14.9% and 13.9% y-o-y in tier I, tier II and tier III cities, respectively.
Contacts
Virginia Huang
Managing Director
Advisory & Transaction Services, Greater China
[email protected]
Shirley Hu
Associate Director
Research, China
[email protected]
Logistics Sector
Supply Imbalance Between Cities
Supply imbalances and doubts about future demand will result in the polarisation of market performance in 2019.
Logistics Sector
NEW SUPPLY EXPECTED TO INCREASE
New supply of high-standard warehouses in major cities stood at 3.75 million sq. m. in 2018, notably below net absorption, which registered 4.3 million sq. m. for the year. Strong demand and the lack of new supply helped average vacancy decrease from 12.6% in 2017 to 9.0% in 2018, laying a solid foundation for the high-standard warehouse market in 2019.
Figure 14: 2019 Warehouse Supply In Major Cities

Source: CBRE Research, January 2019.
Approximately 4.3 million sq. m. of new high-standard warehouse supply is due for completion in 2019. Most new stock is concentrated in Northern and Midwestern China, with Chongqing, Chengdu and Beijing accounting for 39% of total new supply. Eastern China and South China cities will continue to see a decline in supply.
TIGHTER INDUSTRIAL LAND POLICY EXPECTED
Qingdao, Chongqing, Chengdu, Nanjing and other tier II cities saw an exceptional increase in land supply in 2018. However, the availability of industrial and logistics land supply in first tier cities remains limited, with land-use restrictions gradually tightening. Beijing recently introduced stricter regulations on industry and minimum tax commitments for tenants of warehouses, while Shanghai and neighbouring second tier cities are in the process of introducing minimum tax commitments as an industry standard for logistics projects. Tighter industrial regulations and tax requirements have raised the threshold for tenants and have lengthened the leasing process for logistics projects.
SMART WAREHOUSES GAIN TRACTION
Although e-commerce platforms have embraced smart warehouses as they offer more efficient delivery and a better customer experience, many logistics property developers are still hesitant to pursue such projects due to their higher cost and risk. However, CBRE expects growing demand from a broad range of industries and government incentives to adopt new technologies to encourage logistics developers and their tenants to jointly invest in smart warehouses. This trend is likely to see logistics developers partner with third-party logistics providers to construct smart warehouses while entering into multi-decade supplier and service agreements.
DEMAND DRIVERS FACE HEADWINDS
Although high standard warehouse demand continues to be led by e-commerce, 3PLs and manufacturers, these three sectors will face greater uncertainties in 2019.
The decline in consumption growth has slowed expansion by online businesses, which could negatively impact their demand for warehouse space. The growth of total retail sales of consumer goods and online retail sales of physical goods displayed a downward trend in 2018, falling to a three year low of 9% y-o-y and 25% y-o-y, respectively.
The E-logistic Index released by the China Federation of Logistics & Purchasing showed that the overall growth of E-logistics declined in 2018, with sluggish consumption growth likely to ensure this trend continues in 2019.
Figure 15: E-logistics Volume Growth (2016-2018)

Source: CFLP, CBRE Research, January 2019
The U.S.-China trade war has had a negative effect on coastal cities and the manufacturing industry, and this is likely to weigh on demand from 3PLs and manufacturers this year.
SELF-BUILT WAREHOUSES EASE LEASING DEMAND
Many e-commerce companies possess considerable property expertise and are increasingly purchasing land to develop their own warehouses and logistics facilities. CBRE estimates show that since 2009, China’s six major e-commerce companies purchased large area of land to develop more than 40 million sq. m. of storage space national wide. The impact of this trend on the logistics warehouse leasing market became increasingly evident in 2018, with numerous firms relocating operators in several cities to self-built warehouses.
While e-commerce firms will utilise the bulk of this space for self-use, the remainder will be put onto the leasing market, posing a potential threat to traditional logistics property developers. CBRE data show that 3.8 million sq. m. of self-built warehouse space will be completed by the six largest e-commerce companies in 16 major cities between 2019-2020, and will be most pronounced in Chengdu, Hangzhou, Wuhan and Qingdao.
Figure 16: New Supply of Self-built Warehouses and Leasing Warehouses in 16 Major Cities (2019-2020)

Source: CREIS, CBRE Research, January 2019
NEW INFRASTRUCTURE TO SPUR GROWTH OF REGIONAL LOGISTICS HUBS
In October 2018, the State Council issued a new guidance to call for the improvement of infrastructure construction and the allocation of major projects to short-term, medium-term and long-term reserve infrastructure. This points to the rapid extension of transportation infrastructure and faster construction.
In Jing-Jin-Ji cluster, in addition to Beijing and Tianjin, Shijiazhuang, Baoding and Tangshan all have sizable populations. Although high-standard warehouses and logistics facilities in these cities are at the initial stage of development, demand is expected to grow as Beijing reaches its tipping point.
Elsewhere, new infrastructure in the YRD will support the growth of logistics hubs in Nanjing and Nantong, while the completion of the Hong Kong-Zhuhai-Macao Bridge, Humen Second Bridge and Shenzhen-Zhongshan Passage will further enhance cross-strait traffic in the GBA and promote the economic development of relatively underdeveloped areas on the west side of the Pearl River. The spillover of logistics demand from Guangzhou and Shenzhen is expected to result in the formation of new logistics hubs in Cuiheng New Area in Zhongshan; Hongwan Port Area in Zhuhai; and Heshan in Jiangmen.
Figure 17: Top 10 Cities Attracting Land Purchases by E-commerce Firms (2017-2018)
City | Buildable GFA (sq. m.) |
Changsha | 1,142,938 |
Chengdu | 974,186 |
Shijiahuang | 700,000 |
Hangzhou | 687,778 |
Hefei | 637,926 |
Zhengzhou | 627,508 |
Heyuan | 603,973 |
Nantong | 528,297 |
Nanchang | 504,229 |
Guiyang | 469,464 |
Source: CREIS, CBRE Research, January 2019
We mentioned that improved infrastructure leads to the rise of new logistics hubs in the Central and Western China in our market outlook of the previous year, and this will continue to be an important trend for 2019. In the first half of 2018, eight of the top ten provinces in terms of retail sales growth rate were in the central and western regions, with growth rates all above 11%. Logistics land purchases by major e-commerce firms from 2017 to 2018 has convinced the growing logistics demand in the central and western hub cities, such as Changsha, Chengdu, Hefei, Zhengzhou, Nanchang and Guiyang.
RENTAL GROWTH SET TO WEAKEN IN SELECTED MARKETS
Uncertain leasing demand and the trend for e-commerce platforms to construct their own warehouses will continue to exert downward pressure on rental growth in selected markets. Cities with weak demand and/or large amounts of supply including Dalian, Qingdao, Chongqing and Wuhan will see rents remain flat or decline. Tier I cities, and tier II cities in Eastern China, which continue to see a lack of new supply and are more resistant to uncertain demand, are expected to register stable rental growth.
Figure 18: 2019 China Warehouse Rental Forecast In 16 Major Cities

Source: CBRE Research, January 2019.
Contacts
Louisa Luo
Executive Director
Advisory & Transaction - Industrial & Logistics, China
[email protected]
Hera Xiahou
Associate Director
Research, China
[email protected]
Capital Markets
Record High Transaction Volume
Foreign and domestic buyers are expected to continue to seek opportunities in China in 2019, supported by the improving funding environment.
Capital Markets
Despite a range of headwinds including U.S.-China trade conflict and tighter monetary conditions, China commercial real estate transaction volume registered RMB 251.7 billion in 2018, marking an increase of 4% y-o-y and a record high. Purchasing activity was driven by domestic developers and global investors lured by the normalisation of asset prices. Foreign and domestic buyers are expected to continue to seek opportunities in 2019, supported by the improving funding environment.
Figure 19: China Investment Market Transaction Volume

Notes: Including all property transactions valued US$10 million or above either in forms of en-bloc or strata-title or partial ownership acquisition; residential and land transactions are excluded.
Source: CBRE Research, January 2019
FUNDING ENVIRONMENT RECOVERS
Following four targeted RRR cuts in 2018, the PBoC announced a 100 basis points cut in the RRR in January. This move confirms the target of liquidity management has been shifted to maintaining liquidity at reasonable and ample level.
Combined with the stabilisation of M2 money supply, the RRR cut indicates that the real estate funding environment will improve in 2019, although liquidity will remain under strict scrutiny by regulatory authorities. The 10-year government bond yield peaked at around 4% before February 2018 and subsequently decreased to 3.2% by year-end, in line with expectations. The PBoC is unlikely to follow the U.S. Federal Reserve’s interest rate hikes, suggesting that the cost of domestic capital could decline further.
Figure 20: 10-year Bond Rate, RRR and Long-term Lending Rate

Note: RRR has been updated to January 2019
Source: Wind, CBRE Research, January 2019
CBRE expects domestic institutional investors to turn more active this year, with improving liquidity to boost fundraising activity by domestic real estate funds. The lower bond yield is also likely to accelerate investment in alternative assets by domestic insurance companies.
Foreign-funded institutions, which invested over RMB 78 billion in en bloc commercial real estate in China in 2018, representing growth of 60% y-o-y, are expected to remain active in 2019. Fundraising by Asia Pacific-focused real estate funds totaled US$ 20 billion in the first three quarters of 2018, with a 116% y-o-y growth. CBRE data show that real estate funds will deploy around US$ 62 billion of leveraged capital into the region between 2019-2023, US$ 35 billion of which will be directed at value-added and opportunist properties in China.
Figure 21: Closed-end Property Fund Raising Focused on Asia Pacific

Source: Preqin, INREV/ANREV, CBRE Research, January 2019
The supply of investable assets is expected to be plentiful. Between 2015 to 2017, purchases by domestic real estate funds peaked at RMB 101.7 billion. Assuming an investment period of three years, the period between 2019 to 2020 is expected to be the window for asset disposal.
Regulatory authorities’ focus on “housing without speculation” will likely result in continue sluggish residential sales. The average gearing ratio of 80% among China’s listed developers forced them to reduce corporate leverage further in 2019, resulting in ongoing demand for asset disposal and portfolio optimisation.
OFFICE YIELD EXPANSION LIMITED
Although weaker leasing demand and rental growth will drive up office yields, particularly in tier II cities, the limited supply of investable assets will cap expansion to 25 to 30 basis points. Yields in tier I cities will remain stable. Retail yields in tier I cities are likely to stay unchanged. However, cities with a more upbeat outlook and strong growth potential, such as Chengdu, may see yield compression. Stable rental growth and robust investment demand will compress logistics yields in 2019, with those in tier I cities forecast to fall towards 5%. The figure in Beijing could even be sub-5% due to the supply shortage. Yields in major tier II cities will decline by approximately 25 basis points.
Figure 22: 2019 Yield Forecast for Major Cities

Source: CBRE Research, January 2019
INVESTMENT RECOMMENDATIONS
CBRE advises office investors to consider value-added plays in tier I cities. Opportunities may include poor quality buildings in core submarkets and higher quality assets in submarkets with strong growth potential. Properties in Tier II cities with stable leasing fundamentals such as Nanjing and Hangzhou also possess considerable upside.
In the retail sector, the rapid growth of coworking and rental housing is creating opportunities to convert older small-and-medium sized shopping malls in prime areas. Modern shopping centres in highly-populated emerging areas are also attractive investment options.
As investable logistics properties in tier I cities remain tightly held, CBRE suggests investors focus on tier II and tier III cities where infrastructure is being upgraded. Although caution is advised in markets witnessing intensive warehouse development by e-commerce companies, partnerships or co-development with e-commerce companies may provide opportunities for investors to enter this segment.
Offshore debt also provides an attractive investment option considering the U.S. interest rate hike cycle and Chinese developers’ large offshore debts. CBRE also recommends investors consider longer term structural opportunities such as senior housing, rental housing, and data centres.
CHINESE INVESTORS ACCELERATE DISPOSALS
Continued tight capital controls ensured Chinese outbound real estate investment registered just US$ 5.26 billion in H1 2018, marking a decline of 80% y-o-y and the lowest figure for this period since H1 2013. Investment in the U.S. fell by more than 90% but activity in Asia Pacific remained stable. Chinese investors accelerated their disposals of overseas properties, with the value of assets sold by Chinese owners increasing by over 100% in H1 2018. Sellers were a mix of investors taking profits on earlier investments and cash-strapped companies seeking to generate capital to repay debt.
RMB depreciation, the declining current account surplus and domestic financial uncertainty is likely to ensure regulatory authorities maintain existing capital controls in 2019. CBRE therefore expects Chinese outbound real estate investment to remain lacklustre this year, with the wave of disposals set to continue. However, there will be continued interest in logistics, business parks and healthcare related assets, together with other properties for self-use. Chinese investors are expected to utilise capital raised offshore and focus on co-investment and joint venture opportunities, predominantly in Asia Pacific.
Contacts
Alan Li
President, CBRE China
[email protected]
Ashley Qian
Assistant Manager
Research, China
[email protected]
Economy
Uncertainty Hinders Growth
Although job concerns and higher mortgage costs are likely to hinder local consumption in 2019, new stock listing rules and the Greater Bay Area Initiative will provide some support to economic growth.
Economy
GDP GROWTH SLOWS
GDP growth stood at 3.7% for the first three quarters of 2018, continuing the strong momentum recorded in 2017. However, growth in Q3 2018 slowed noticeably to 2.9% under the impact of U.S.-China trade conflict. Aggregate trade for the first nine months of the year nevertheless rose by 10% y-o-y to US$843 billion, the highest on record. The government estimates 2018 full-year GDP growth at 3.2%, down from 3.8% in 2017.
Figure 23: Hong Kong GDP Growth (%)

Source: HKSAR Census and Statistics Department
STOCK AND RESIDENTIAL PRICES FALL
The wealth effect, which drove Hong Kong’s investment market for many years, started to reverse in H2 2018. The peak and trough of the Hang Seng Index ranged by over 8,900 points throughout the year, the most volatile period since the post-Global Financial Crisis rebound in 2009.
Residential property prices also began to fall after reaching an all-time peak in July. Hong Kong’s banks decided to lift their Best Lending Rates by 12.5 - 25.0 bps to 5.125% - 5.5% in September, marking the first hikes since 2006. Residential prices declined by 7.2% from the peak in July to November 2018.
Figure 24: Hong Kong Bank Rate (%)

Source: Hong Kong Monetary Authority, CBRE Research, January 2019
RETAIL SALES STRENGTHEN
Retail sales registered 11% y-o-y growth for the first three quarters of 2018, marking the highest growth since 2013. Growth was driven by record-breaking visitor arrivals and steady domestic consumption. Despite the economic uncertainty, the overall unemployment rate was down to 2.8%, the lowest in two decades.
GROWTH HINGES ON TRADE CONFLICT
Based on the existing list of tariffs published by the U.S. and China, which are Hong Kong’s two largest trading partners, the value of affected re-export products in Hong Kong totals HK$70 billion (US$9 billion). Although this represents just 0.9% of Hong Kong’s total aggregate trade in 2017, the ripple effect on the local economy could be significant. The trading and logistics sector is one of the Hong Kong economy’s four major pillars and accounts for 16% of total employment. Should the trade war persist, worries over job security will likely impact consumer confidence, create downward pressure on local consumption and negatively affect investment sentiment.
INTEREST RATE HIKES HINDER SPENDING
While the U.S. is expected to implement further rate hikes in 2019, it remains unclear whether Hong Kong’s banks will follow suit. Any further rate hikes will increase the financial burden on local households and induce consumers to spend less on discretionary items.
IPO MARKET EXPECTED TO SLOW
Although Hong Kong reclaimed its status as the world’s top IPO market in 2018 following the introduction of new listing rules, activity is expected to slow this year due to global stock market volatility. Banks and relevant professional services firms will likely encounter a more difficult business environment in 2019.
NEW INFRASTRUCTURE BOOSTS TOURISM
The opening of the High Speed Rail and the Hong Kong-Zhuhai-Macau Bridge drew more tourists to Hong Kong in Q4 2018. CBRE Research expects this trend to continue in 2019 as the SAR improves its connectivity and solidifies its status as one of the leading cities of the Greater Bay Area. However, any further depreciation of the RMB could result in weaker spending by Chinese tourists and negatively impact the local retail market.
GBA TO ATTRACT INVESTMENT
The Greater Bay Area (GBA) is primed for rapid growth in the coming years and will eventually become the world’s largest bay economy. Several aspects of Hong Kong’s economy are expected to benefit from the Central Government’s pursuit of the GBA Initiative, which will see the introduction of policies and incentives designed to draw investment to the region, both from within and outside China. As the most mature international financial city in the GBA, Hong Kong will continue to attract domestic and foreign companies to establish their offices in the city. 529 overseas companies newly established regional headquarters, regional offices or local offices in Hong Kong in 2018, the highest figure since 2004. This trend is expected to continue in the coming years, supported by the GBA initiative.
Contacts
Marcos Chan
Head of Research
Hong Kong, Southern China & Taiwan
[email protected]
Sharon Chan
Associate Director
Research, Hong Kong
[email protected]
Office Sector
Office Rents Reach The Peak
A two-tier market is expected this year, with rents in core submarkets declining but those in decentralized areas continuing to grow.
Office Sector
NEW SUPPLY UNLOCKS DEMAND
The office market enjoyed a strong year in 2018, with net absorption of 3.0 million sq. ft. marking the highest annual total since 2010. The sizable volume of new Grade A office stock released pent-up occupier demand for expansion, consolidation and upgrading. Although the 2.0 million sq. ft. of new supply completed in 2018 was all located in non-core districts, approximately 81% of this figure has already been leased, with at least 0.6 million sq. ft. of space involving decentralisation moves.
Figure 25: Grade A Office Supply

Source: CBRE Research, January 2019
AGILE SECTOR CONTINUES TO EXPAND
Agile space providers including coworking centres and serviced offices expanded their Grade A footprint from 873,000 sq. ft. to 1.1 million sq. ft. in 2018. Kowloon saw the bulk of expansion, with the stock increased by 53% y-o-y. Growth was led by larger operators while several new brands also entered the market.
CHINESE LEASING DEMAND FADES
Chinese companies remained one of main drivers of demand for space in core locations in 2018, accounting for 24% of new lettings. However, tighter controls over capital outflows and rising economic uncertainty stemming from the trade war resulted in weaker momentum towards year end, with only 39% of the new lettings by PRC firms done in H2 2018.
ALL SUBMARKETS SEE RENTAL GROWTH
Although rental growth accelerated to 6.7% y-o-y in 2018 from the 3.1% recorded in 2017, increases were front-loaded in H1 2018. Low vacancy continued drive growth in core areas, with rents in Central, Tsim Sha Tsui and Wan Chai/Causeway Bay rising by 7.1%, 9.3% and 8.9% y-o-y, respectively. The decentralisation trend ensured rental growth in Hong Kong East and Kowloon East, up 11.0% and 6.7% y-o-y, respectively.
WEAKER DEMAND FROM CHINESE FIRMS
Leasing demand from Chinese companies is expected to soften further in H1 2019 due to ongoing US-China trade tension. Capital controls and RMB depreciation are further impacting Chinese firms’ ability to afford high rents, meaning that most companies are unlikely to expand their Hong Kong office footprint. A prolonged trade conflict would likely prompt some downsizing or possibly even office closures for some non-performing firms. Landlords are also expected to become more cautious towards leasing space to Chinese firms due to tenant covenant concerns.
DECENTRALISATION TO CONTINUE
Economic uncertainty will ensure cost-saving remains the key theme among multinational occupiers. Several high profile decentralisation moves over the past 12-18 months by companies across a range of sectors have prompted many other firms to review their core office footprint. The completion of seven new projects providing a total of 2.4 million sq. ft. of new office space in 2019, of which 80% will be in non-core locations, will encourage further decentralisation over the coming year.
AGILE SPACE DEMAND SETS TO SLOW
Expansion of co-working centres may slow in 2019 as operators turn to look for profit-sharing deals and CAPEX subsidies. With not much occupancy pressure, Grade A office landlords will less likely accommodate. Agile space operators are expected to be more active in non-Grade A buildings while boosting occupancy of their existing centers in 2019.
RENTAL GROWTH EXPECTED TO DIVERGE
With the impact from U.S.-China trade conflict likely to continue in H1 2019, pressure on the logistics and trading sector is set to increase. Despite these sectors occupying just 16% of Grade A office supply, any downturn in their fortunes will negatively impact overall office demand.
High value-add services such as banking and finance, law and other professional services may also be negatively affected by financial market instability and asset depreciation. Occupiers in these sectors are therefore unlikely to commit to lease agreements demanding rents higher than the current peak.
CBRE expects rents in core locations to remain flat in 2019. However, in the event that sentiment weakens, corporates may begin to downsize and release shadow space onto the market. Although existing vacancy would remain low, increased shadow space could put some landlords under pressure, which would see core submarket rents decline by 0% to 5% in 2019.
The rental outlook for non-core areas remains upbeat, with strong decentralisation demand expected to continue to absorb vacancy in non-core locations. Landlords of existing buildings are in good positions to hold up their asking rents. With new and higher-quality buildings gradually entering into the market, average rents in decentralized locations will also escalate. Rents in decentralised submarkets are expected to rise 0% to 5% over the course of 2019.
Figure 26: Grade A Office Rental Trend

Source: CBRE Research, January 2019
Contacts
Oliver Rigg
Executive Director
Advisory & Transaction Services, Hong Kong
[email protected]
Jerry Ng
Senior Manager
Research, Hong Kong
[email protected]
Peter Leung
Senior Analyst
Research, Hong Kong
[email protected]
Retail Sector
Retail Sentiment Improves
U.S.-China trade conflict and concerns around job security will see retailers adopt a more conservative approach towards expansion.
Retail Sector
VISITOR ARRIVALS STAGE RECOVERY
Total retail sales rose by 9.7% y-o-y for the first eleven months of 2018, a significant improvement on the 2.2% y-o-y growth recorded in full-year 2017. The opening of the High Speed Rail and the Hong Kong-Zhuhai-Macau Bridge helped visitor arrivals for 2018 break the previous annual record set in 2014, although per-capita spending by overnight visitors is still lower than four years ago.
SALES REBOUND ACROSS THE BOARD
Tourist-oriented trades such as watches & jewellery registered strong sales growth of 16.2% y-o-y in the first eleven months of the 2018. Non-luxury trades including medicines & cosmetics and electrical goods also performed well over the same period, rising by 16.3% y-o-y and 10.5% y-o-y, respectively. Eateries continued to perform well, with total restaurant receipts rising 7.4% y-o-y in the first three quarters of 2018, the best performance since 2008.
Figure 27: Local Consumption, Retail Sales and Restaurant Receipts YOY Growth

Source: HKSAR Census and Statistics Department, CBRE Research, January 2019
RENTAL GROWTH TURNS POSITIVE
Improving retail sales and stronger sentiment ensured retail rents returned to marginally positive territory in 2018. Full-year rents edged up 0.2%, marking the first growth after four consecutive annual declines. Shopping mall rents were broadly flat throughout the year.
CONSUMPTION SENTIMENT TO WEAKEN
With local consumption sentiment remaining solid in 2018, the low-base effect is expected to diminish in 2019, meaning that retail sales growth momentum will dissipate. Stock market volatility, declining residential property prices and potential interest rate hikes will result in more cautious consumer spending, especially for discretionary goods. However, steady demand for F&B, daily necessities, and healthcare products is likely to support retail leasing demand.
TOURISM PICTURE IMPROVES
The recent completion of new infrastructure is expected to support the further increase in visitor arrivals and facilitate tourism market growth in the medium-term. Leasing demand from tourist-oriented trades such as watches & jewellery, cosmetics and healthcare retailers will remain solid for the foreseeable future.
RETAILERS TO BE FLEXIBLE
Despite the tourism rebound, local job security concerns resulting from global economic uncertainty are expected to prompt retailers to adopt a cautious approach towards expansion. Pop-up stores will remain a popular option for retailers who would like to test the popularity of their products before committing a long lease. Retailers are also expected to adopt new retail technology enabling them to minimise overheads and gain access to big data. Omni-channel retailers and electronic payments are expected to become more widely used.
MORE RETAIL UNITS TO BE SUBDIVIDED
With fast fashion operators focusing on developing their online platforms with a view to fine-tuning their omnichannel offering, leasing demand for large flagship stores in prime locations is diminishing. Landlords are therefore expected to sub-divide large retail spaces into smaller units in order to quickly fill occupancy.
LEASING TO FOCUS ON CORE MARKETS
A total of 2.5 million sq. ft. of retail space is scheduled to be completed in 2019, of which around 70% is located in the four core key retail districts. Tsim Sha Tsui will see the addition of two major projects, K11 Musea and H Zentre, both of which are expected to announce major leasing transactions this year.
LANDLORDS TO REMAIN FLEXIBLE
Landlords are expected to remain flexible towards rental negotiations this year. Rental growth will mainly be achieved via value-added strategies but will be minimal until market uncertainty dissipates. CBRE expects both high street and shopping centre rents to remain flat in 2019.
Figure 28: High Street Shop Rental Growth (Core Areas; Annual & Accumulative)

Source: CBRE Research, January 2019
Contacts
Lawrence Wan
Senior Director
Advisory & Transaction Services — Retail, Hong Kong
[email protected]
Jerry Ng
Senior Manager
Research, Hong Kong
[email protected]
Kendrew Leung
Senior Analyst
Research, Hong Kong
[email protected]
Logistics Sector
Strong Leasing Demand
U.S.-China trade conflict and related uncertainty is expected to negatively impact the local logistics market over the course of the year.
Logistics Sector
STRONG EXPORT GROWTH IN 2018
Despite the onset of U.S.-China trade conflict, Hong Kong’s exports to Asia, North America and Western Europe increased by 8.1% y-o-y, 9.2% y-o-y and 8.6% y-o-y, respectively, for the first eleven months of 2018. Hong Kong’s total merchandise trade value also grew by 8.7% over the same period, marking the strongest growth for seven years.
HIGH-VALUE TRADE DRIVES LEASING
Hong Kong’s container throughput declined by 5.4% y-o-y in the first eleven months of 2018. However, air freight climbed 2.6% y-o-y over the same period, highlighting the growing importance of e-commerce and logistics services catering to the growth of high-value and time-sensitive items such as electronics and healthcare products. Demand from these high-value trades accounted for nearly half of new leasing activity during 2018.
LOGISTICS CONVERSIONS CONTINUE
A total of four warehouses providing a total of 750,000 sq. ft. were redeveloped or converted to commercial, residential or data centre use in 2018. This resulted in the forced relocation of logistics tenants and worsened the demand-supply imbalance. Vacancy had already fallen from 5.2% in 2017 to 1.9% in 2018. Strong demand and limited space availability pushed up logistics rents by 2.8% in 2018, the strongest growth in four years.
Figure 29: Warehouse Vacancy

Source: CBRE Research, January 2019
IMPACT ON TRADE YET TO MATERIALISE
While the U.S. and China remain mired in a protracted trade conflict with no resolution in sight, the impact has yet to filter through to logistics demand in Hong Kong. However, should the situation worsen and the U.S. impose tariffs on all Chinese goods, 8.5% of Hong Kong’s total exports would be directly affected. This could potentially have a knock-on effect on warehouse leasing activity.
U.S. REASSESSES HONG KONG’S STATUS
The U.S. Congressional-Executive Commission on China recently proposed reviewing the special status granted to Hong Kong in the United States–Hong Kong Policy Act, which enabled Hong Kong to be regarded as a separate customs area from China. The Act allows Hong Kong to import sensitive technology from the U.S.. If this privilege is removed, Hong Kong’s status as a regional logistics hub would be significantly impacted, as high tech products currently comprise circa 60% of the SAR’s local exports.
GBA DRIVES NEW OPPORTUNITIES
The recent opening of the Hong Kong-Zhuhai-Macau Bridge and the upcoming Liantang /Heung Yuen Wai Boundary Control Point are set to further integrate Hong Kong with other cities in the GBA by reducing travelling time between the major industrial areas and the border gates. This will further strengthen Hong Kong’s position as a core logistics hub for the GBA and ensure sustained logistics demand for industrial premises.
VACANCY TO REMAIN TIGHT
Approximately five million sq. ft. of warehouse space has been earmarked for removal from the market over the next five years. Much of this space will be converted or redeveloped for residential or commercial use. The onset of the 5G-era will also see strong demand for data centres, many of which will be built in industrial premises. Forced relocation will therefore remain a major theme in 2019, expedited by the reintroduction of the industrial building revitalisation scheme. The recent slowdown in investment sales is not likely to result in the withdrawal of building conversion and redevelopment plans, meaning that occupiers in targeted buildings may face uncertainty around lease terms. The lack of new warehouse supply in 2019 will ensure vacancy remains low.
STRONG DEMAND TO PUSH UP RENTS
Despite weaker global consumption, demand for staples such as healthcare products and groceries is expected to remain resilient. The anticipated double-digit annual growth in regional and local e-commerce sales over the next five years will continue to boost leasing demand from third-party logistics firms. Stable demand and low vacancy is forecasted to translate to up to 5% y-o-y growth in warehouse rents in 2019.
Figure 30: Warehouse Rental Trend

Source: CBRE Research, January 2019
Contacts
Samuel Lai
Senior Director
Advisory & Transaction Services — Industrial & Logistics, Hong Kong
[email protected]
Peter Leung
Senior Analyst
Research, Hong Kong
[email protected]
Capital Markets
Sentiment Turns Cautious
U.S.-China trade conflict and further interest rate hikes are expected to ensure investors adopt a more cautious approach in 2019.
Capital Markets
INVESTMENT ACTIVITY COOLS
Commercial real estate transaction volume (including deals over US$10 million, excluding pure land sales and related transactions) registered the second highest half-yearly total on record at HK$95.8 billion in H1 2018. However, geopolitical tension significantly dampened investment sentiment in the second half of the year, with transaction volume falling to HK$45.8 billion in H2 2018, just half of the H1 2018 total.
Figure 31: Commercial Property Investment Volume

Notes: Deals > US$10 million, excl. pure land and related transactions)
Source: CBRE Research, January 2019
NEGATIVE CARRY HINDERS INVESTMENT
Offices remained the main focus for investors in 2018, with HK$77.1 billion worth of assets changing hands, representing 55% of total investment volume. Activity was boosted by the completion of fourteen en-bloc deals worth a total of HK$48.6 billion. Strata-titled office deals were hampered by several interest rate hikes which ensured office investments moved into negative-carry conditions. Capital values increased by 13.4% in 2018 while yields further compressed by 14% points.
Figure 32: Capital Value Trend

Source: CBRE Research, January 2019
CHINESE INVESTORS TURN CAUTIOUS
Chinese capital accounted for 21% of total commercial real estate transactions in 2018, slightly higher than the average for 2015-2017. However, the proportion declined over the course of the year, falling from 28% in Q1 2018 to 5% in Q4 2018. This was due to U.S.-China trade conflict and tighter capital controls, which forced some Chinese buyers to find local partners for joint investments.
INVESTMENT DEMAND SET TO SOFTEN
The European Central Bank is due to end its quantitative easing programme in 2019, while the Bank of Japan may follow suit as inflation nears its target. The growth rate of Hong Kong money supply (M2) decelerated from 10.5% per annum during the U.S. QE1 to QE3 period to just 2.2% y-o-y in October and November combined, lower than the level in Q4 2015 to Q3 2016, when market activity weakened. While slower growth in liquidity is expected, many institutional funds raised capital in 2018, which should ensure ample liquidity this year. Global economic uncertainty, the expectation of further U.S. interest rate hikes and the late stage of the rental upcycle are likely to result in weaker investment appetite in 2019. Transaction volume is expected to decline this year, with a more pronounced fall in H1 2019, although activity could pick up significantly in the event of a resolution to U.S.-China trade negotiations.
DECENTRALISED OFFICE DEMAND GROWS
Although offices in core submarkets will experience rental pressure this year amid softer leasing demand from Chinese companies, rents for non-core offices are expected to be supported by growing decentralisation demand. Capital value growth for non-core offices has lagged behind that for core submarkets by 17%-points over the past three years. CBRE expects to see pent-up investment demand flowing into decentralised office assets in 2019. Other supporting factors include improved connectivity to non-core areas resulting from the forthcoming opening of the Tai Wai to Hung Hom Section of the Shatin to Central Link and the Central-Wan Chai Bypass. Overall office capital values are forecasted to undergo a mild correction of about 5% in 2019, primarily due to the potential rental adjustment and rising yield expectations in core submarkets.
NEIGHBOURHOOD MALLS TO BENEFIT
Retail property investment is set to focus on neighbourhood assets, backed by their resilience to the economic downcycle. Value-added strategies remain popular but will lose traction should domestic consumption suffer from a negative wealth effect resulting from asset price corrections and stock market volatility. Some developers may consider disposing of non-core assets to generate capital, while individual investors or property funds could seize the opportunity to buy. Retail capital values are expected to remain flat.
INDUSTRIAL REVITALISATION RETURNS
The government recently announced the relaunch of the industrial revitalisation scheme to promote the redevelopment of pre-1987 industrial buildings. This is expected to spur more en-bloc transactions or portfolio sales for redevelopment. Strong demand for the alternative use of industrial premises such as data centres and laboratories will also drive demand for industrial property. Industrial capital values are expected to maintain their growth rate of up to 5% in 2019.
Contacts
Tom Gaffney
Regional Managing Director, Greater Bay Area & Hong Kong
[email protected]
Peter Leung
Senior Analyst
Research, Hong Kong
[email protected]
Kendrew Leung
Senior Analyst
Research, Hong Kong
[email protected]
Economy
Reshoring Set to Boost Economy
The domestic economy will continue to recover in 2019 on the back of stable expansion in domestic and external demand.
Economy
Taiwan registered modest economic growth over the course of 2018, with real GDP increasing by 2.7% y-o-y. Growth was mainly driven by steady export demand, with total exports rising by 6.2% y-o-y. Fixed asset investment by the private sector increased by 3.2% y-o-y due to the relatively low base of comparison with 2017, along with increased investment in the construction industry.
Average per capita salaries increased by 4.1% y-o-y over the first ten months of 2018, which led to stronger spending by Taiwanese consumers. However, global and domestic stock market volatility, which saw the TAIEX weaken by 9.2% over the course of the year, somewhat affected consumer confidence and dented the wealth effect, Private consumption nevertheless increased by 2.2% y-o-y in 2018.
Figure 33: GDP and Components of Demand

Source: Oxford Economics, January 2019
RESHORING SET TO BOOST ECONOMY
Oxford Economics forecasts that Taiwan’s GDP will grow by 2.1% y-o-y in 2019 on the back of stable expansion in domestic and external demand. However, total exports are expected to increase by just 1.96% y-o-y due to the global economic slowdown. While uncertainties stemming from the U.S.-China trade dispute are likely to impede global economic growth and dampen local exports, the domestic industrial sector may benefit in the short term as Taiwanese manufacturers reshore production from the mainland back to their home market to avoid punitive tariffs. The final months of 2018 saw several Taiwanese manufacturers purchase industrial properties in Taiwan for self-use.
Government investment is forecast to surge by 11.0% y-o-y during 2019, underpinned by the implementation of the Forward-looking Infrastructure Development Programme. Authorities plan to spend NT$227.5 billion on public infrastructure between 2019 and 2020, of which 18.6% will be allocated to mass transportation projects across Taiwan. New and extended metro systems in major cities including Taipei, Taoyuan and Kaohsiung will improve accessibility citywide and may attract local and foreign developers and real estate investors to seek investment opportunities around transport nodes.
Private consumption is forecast to grow 2.5% y-o-y in 2019 in light of the healthy job market. The unemployment rate stood at 3.70% in November 2018 and is expected to remain low in the short to medium term on the back of companies’ strong hiring intentions. The increase in the monthly minimum wage, effective from January 2019, will stimulate spending by Taiwanese consumers and could encourage retailers to commit to new leases.
Figure 34: Labour Market Trends

Source: Oxford Economics, January 2019
While the U.S. Federal Reserve raised interest rates four times in 2018, Taiwan’s Central Bank held its policy rates unchanged during the year to support economic growth. In view of low inflation and the modest economic growth in 2019, the Central Bank is less likely to raise benchmark interest rates for the foreseeable future. The persistent low interest rate environment will therefore continue to encourage local enterprises to purchase commercial properties for self-use. On the other hand, the housing market may undergo a further price correction in 2019 as homebuyers are expected to remain cautious.
Figure 35: Discount Rate

Source: Central Bank of Taiwan, January 2019
FOREIGN INVESTORS EYE DEVELOPMENT PROJECTS
Taiwan’s municipal elections were held in November 2018. The results suggested voters are unhappy with the ruling party and are dissatisfied with current economic conditions and some policies implemented by the central government. It is expected that newly elected governors will be more aggressive in attracting private sector investment this year.
The city government of Taipei is engaged in a drive to regenerate the western part of the city, with several new development projects in the works. A recent tender for one large-scale mixed-use project attracted two bidders, with the government expected to sign a contract with a consortium comprising Nan Hai Development from Hong Kong and Malton Berhad from Malaysia.
The city government also plans to conduct two new development projects in Xinyi-Jilong Area (XJA), Taipei’s CBD, both of which will likely attract multiple interested bidders, including local insurance companies. One project involves a 16,000 sq. m. plot of commercial land in the centre of XJA. Interest in these sites is strong from domestic and foreign investors, supported by the shortage of CBD development sites and the robust office market.
Contacts
Ping Lee
Associate Director
Research, Taiwan
[email protected]
Francine Huang
Analyst
Research, Taiwan
[email protected]
Office Sector
Coworking Growth Expected
Positive hiring intentions are expected to support strong office leasing activity over the course of 2019.
Office Sector
LEASING DEMAND REMAINS ROBUST
Taipei's Grade A office market recorded positive net absorption of 34,386 ping over the course of 2018, the highest level since 2006, on the back of robust demand from local and foreign companies relocating to newly built properties. Leasing activity was led by upgrading demand, with professional services and TMT firms especially active.
Three Grade A office buildings were completed in 2018, providing a total GFA of 53,265 ping. Despite solid take-up, average Grade A office vacancy increased to 12.0% in Q4 2018 from 9.6% a year earlier.
Figure 36: New Supply, Net Absorption and Vacancy

Source: CBRE Research, January 2019
SUPPLY-DRIVEN RELOCATIONS CONTINUE
The addition of the largest volume of new supply since 2004 somewhat alleviated the shortage of large contiguous space in 2018. Several large tenants including a number of multinationals relocated to new buildings for expansion or consolidation purposes. By year-end, only five Grade A office buildings offered 800-ping of contiguous space, while 78% of Grade A office buildings reported vacancy at below 10%. Although several units remain available in selected buildings due to flight-to-quality activity, these spaces are attracting strong enquiries from current tenants of Grade B properties.
NEW SUPPLY SUPPORTS RENTAL GROWTH
Due partly to the availability of new stock, which commands higher average rents, average Grade A office rents in Taipei rose by 2.53% y-o-y to NT$2,705 per ping in 2018. In XJA, several landlords adopted a firmer stance towards rents in view of solid demand, ensuring average rents in the area climbed 2.56% y-o-y to reach NT$3,075 per ping by the end of 2018.
Figure 37: Grade A Office Rent

Source: CBRE Research, January 2019
HEALTHY LEASING DEMAND EXPECTED
The domestic economy will continue to recover in 2019, although growth is expected to occur at a slower pace. Hiring intentions will remain stable, with a Ministry of Labour survey published in Q4 2018 finding that one-fifth of employers intend to increase their headcount to meet higher production demand. The office leasing market is expected to remain robust in 2019, mainly led by relocation and expansion demand from multinationals in the tech sector seeking to accommodate organic growth. Net absorption is forecast to remain solid in H1 2019, underpinned by relocations to newly-built properties. The absence of new supply in 2019 means average Grade A office vacancy is forecast to drop by 3.6 percentage-points to 8.3% by the end of the year.
Figure 38: Employers’ Hiring Intentions

Source: Ministry of Labour, January 2019
LARGE SPACES TO REMAIN LIMITED
CBRE expects some landlords in prime locations to attempt to raise rents upon lease renewals on account of solid demand. Grade A office rents in Taipei are therefore expected to grow by 1.5% y-o-y in 2019, partly supported by the tight supply of large contiguous space in CBDs. Tenants are advised to plan their office moves well ahead of expiry to ensure they obtain space that meets their requirements.
FLIGHT-TO-QUALITY REMAINS KEY TREND
Due to the tight supply of quality space in the Taipei CBD, decentralised areas are likely to see sporadic leasing activity in 2019. Although several multinationals in the financial and technology sectors have displayed strong interest in moving to decentralised areas for cost saving, low vacancy in these areas will likely hinder such activity. Many under-construction schemes in more affordable locations have received enquiries from occupiers currently residing in the CBD.
COWORKING EXPANDS IN TAIPEI
While coworking space operators have expanded aggressively in many Asian cities in recent years, their footprint in Taipei remains relatively limited. Only three foreign coworking space operators had a presence in the Taipei CBD in 2018. However, recent quarters have seen an uptick in interest from international operators seeking to establish themselves in Taipei. CBRE expects to see coworking space operators emerge as a new source of office leasing demand in Taipei this year.
Coworking sector expansion will be facilitated by the recent introduction of International Financial Reporting Standard (IFRS) 16, which has eliminated off-balance sheet reporting and requires occupiers to recognise most leases on balance sheets as liabilities. The exception is lease obligations of less than 12 months, which can still be booked as an expense. CBRE expects this requirement to encourage more occupiers to pursue short-term leases and increase their use of flexible space, such as that provided by coworking operators.
Contacts
Man Chan
Senior Director
Advisory & Transaction Services, Taiwan
[email protected]
Ping Lee
Associate Director
Research, Taiwan
[email protected]
Francine Huang
Analyst
Research, Taiwan
[email protected]
Retail Sector
Cautious Optimism Reigns
Retailers are expected to retain a conservative attitude towards expansion, only committing to leases at fair market value.
Retail Sector
RETAIL SALES REMAIN HEALTHY
Total retail sales in Taiwan rose by 3.27% y-o-y in the first eleven months of 2018 on the back of solid sales of general merchandise goods. A series of promotional events helped department stores and shopping centres generate 1.79% y-o-y growth in sales revenue during the period. Core-retail sales excluding automobiles and gasoline also rose 3.01% y-o-y, suggesting that many consumers shifted to buying mode amid the steady economic recovery. Non-store retailing registered 6.55% y-o-y growth as e-commerce gained further traction.
INBOUND TOURISM PICKS UP
Visitor arrivals to Taiwan rose by 3.26% y-o-y to 9.94 million in the first eleven months of 2018, with the figure topping 10 million in early December. This marked the fourth consecutive year that visitor arrivals had exceeded the 10-million mark. The number of visitors from South East Asia rose by 14.86% y-o-y, while arrivals from mainland were flat due to uncertainty in cross-strait relations and Taiwanese municipal elections. Souvenir shops and duty-free stores registered sales growth of 5.03% y-o-y in the first eleven months of 2018.
Figure 39: International Visitor Arrivals

Source: Tourism Bureau, CBRE Research, January 2019
NEW POLICIES SET TO DRIVE FURTHER TOURIST GROWT
Taiwan’s inbound tourism market will likely enjoy faster growth in 2019 on the back of government policies to diversify source markets. New measures include a 14-day visa-exemption for Russian visitors and a reduction in the amount of money Chinese tourists are required to present in official bank statements. To enhance convenience for foreign travellers and boost shopping expenditure, authorities plan to increase the upper limit for on-site small-amount tax refunds. At present, travellers spending less than NT$24,000 in one day at one single authorised store qualify for on-site small-amount tax refunds. Effective 1 January 2019, the limit has been revised to NT$48,000 to stimulate more spending. These new measures are expected to drive stronger tourist consumption growth, which should filter through to local retailers.
RETAIL SALES GROWTH TO CONTINUE
Total retail sales are forecast to increase 2.8% y-o-y in 2019 on the back of improving labour market conditions. The recent rise in the minimum wage and healthy hiring intentions will likely promote domestic consumption growth, although further stock market volatility may continue to weigh on the wealth effect.
Figure 40: Annual Growth in Retail Sales and Disposable Income

Source: Oxford Economics, January 2019
Retailers are expected to maintain a cautiously optimistic approach towards expansion in 2019. Although vacancy in several major shopping districts improved during 2018, this was largely due to landlords’ greater flexibility towards asking rents as they sought to improve occupancy. High street shop rents in Taipei edged down by 0.8% y-o-y in 2018. Retailers are expected to retain a conservative attitude towards retail leasing in 2019 and will only commit to leases at fair market value. High street shop rents are forecast to edge up 0.4% y-o-y in 2019.
Figure 41: High Street Shop Rents

Source: CBRE Research, January 2019
STRONGER DEMAND FROM F&B
F&B receipts grew by 4.35% y-o-y in January to November 2018, supported by the continued popularity of eating out. F&B operators are expected to continue to expand in 2019, led by Japanese and domestic operators. Local F&B groups are likely to launch more new brands and diversify. Shopping centre landlords are also expected to allocate more space to accommodate F&B growth.
EXPERIENTIAL RETAIL GAINS TRACTION
In terms of general retail trades, sportswear retailers are expected to remain a key driver of leasing demand, although activity will probably decelerate following several years of rapid expansion. Cosmetics and personal care retailers will be active but relatively cost sensitive. Fast fashion groups will likely introduce more new brands, while focusing on improving their online sales platforms.
Growing local demand for luxury goods coupled with the steady inflow of mainland tourists helped watch & jewellery sales increase by 3.44% y-o-y in the first eleven months of 2018. Luxury brands are expected to expand steadily this year, with a strong focus on securing space in prime shopping malls.
Entertainment and other experimental retailers are set to gradually emerge as a new source of demand this year. Department stores and shopping mall landlords are considering introducing more retailers in this category to boost footfall and differentiate their assets from the competition.
Contacts
Man Chan
Senior Director
Advisory & Transaction Services, Taiwan
[email protected]
Ping Lee
Associate Director
Research, Taiwan
[email protected]
Francine Huang
Analyst
Research, Taiwan
[email protected]
Capital Markets
Growing Industrial Demand
Industrial investment is set to benefit from controls on idle land and reshoring by Taiwanese manufacturers moving production out of mainland China.
Capital Markets
SOLID INVESTMENT DEMAND
Commercial real estate investment turnover rose by 43.8% y-o-y to NT$107.45 billion* in 2018, the highest annual total in four years. Investment activity was driven by local corporations, which accounted for 52% of total transaction volume. A series of purchases by large manufacturing companies pushed up the turnover of factory and I/O properties to NT$58.49 billion in 2018, an increase of 88.4% y-o-y. Office investment turnover more than doubled to NT$25.07 billion thanks to the transaction of investment grade properties in Taipei.
Figure 42: Property Investment Turnover

Source: CBRE Research, January 2019
CAPITAL VALUES WEAKEN
The relatively quiet investment market in the first half of the year prompted a number of vendors to sell commercial properties at a lower-than-market prices. This resulted in capital values declining by 0.4% in H1 2018 compared to H2 2017, and by a further 0.3% in H2 2018. However, rental growth continued to be supported by healthy leasing demand, ensuring that yields improved in the second half of the year.
STRONG DEMAND FOR LAND
Land transaction volume increased by 50.6% y-o-y in 2018 as several local developers purchased development sites to expand their land banks amid the residential market downturn. Local developers are expected to continue to acquire land parcels in major cities in 2019 as many vendors have now adopted a more realistic attitude towards pricing.
LOW RATES DRIVE SELF-USE DEMAND
Interest rates in Taiwan were unchanged in 2018 and will likely remain so this year as the Central Bank attempts to offset the potential slowdown in GDP growth. While this will favour owner-occupiers and support commercial property investment activity, buyers will remain price and location sensitive.
Figure 43: Commercial Real Estate Investment by Buyer Type, 2018

Source: CBRE Research, January 2019
INSURERS TO FOCUS ON LOCAL ASSETS
Insurance companies will retain a prudent approach towards commercial real estate investment in 2019, only considering properties generating higher returns. The lack of investable stock will further inhibit buying activity over the course of this year. However, insurance companies are expected to show stronger interest in office and industrial office assets providing stable rental income, along with development projects in major cities. Interest in overseas investment will remain limited amid increasing risks and intense competition for prime assets in gateway cities.
MILD PRESSURE ON CAPITAL VALUES
With cost-sensitive owner-occupiers driving the investment market in 2019, office capital values are expected to decline by 5% y-o-y. Yields are forecast to edge up by 12 basis points to 2.68% over the year.
Shopping malls are finding it increasingly challenging to maintain growth amid growing competition from online retailers. However, most department store and shopping mall owners are under no financial pressure to sell and have no intention to dispose of their assets. Retail investment transactions are therefore likely to remain limited. Prime retail yields are expected to edge up to 3.20% in 2019.
Figure 44: Yield Trends

Source: CBRE Research, January 2019
HOTELS TO REMAIN NICHE ASSET CLASS
The highly competitive hospitality market will result in very few hotel transactions in 2019, with activity limited to institutional investors seeking to diversify their portfolios.
INDUSTRIAL MARKET TO TURN MORE ACTIVE
In response to the shortage of suitable industrial sites, the government recently identified a list of idle industrial plots in industrial parks administrated by the Ministry of Economic Affairs. Buyers acquired these sites more than three years ago but have not yet built on them. Owners are now required to commence construction or face having them forcibly put on the market. CBRE expects some of these idle sites to be made available for sale in 2019.
RESHORING TO DRIVE NEW DEMAND
Increasing uncertainty caused by the U.S.-China trade conflict has prompted several mainland China-based Taiwanese manufacturers to reshore production to avoid punitive tariffs. Taiwanese authorities will commence a three-year programme this year to assist mainland China-based Taiwanese manufacturing companies move their factories back to Taiwan. The programme includes a range of incentives related to land, manpower, tax, utilities and capital services. CBRE therefore expects industrial properties to remain keenly sought-after this year on the back of stronger demand.
Contacts
Cynthia Chu
Regional Managing Director, Taiwan
[email protected]
Ping Lee
Associate Director
Research, Taiwan
[email protected]
Francine Huang
Analyst
Research, Taiwan
[email protected]
Asia Pacific Real Estate Market Outlook 2019
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