GUANGZHOU PROPERTY MARKET 2015 REVIEW & 2016 OUTLOOK

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1 GUANGZHOU PROPERTY MARKET 215 REVIEW & 216 OUTLOOK Colliers International Guangzhou Property Market 215 Review and 216 Outlook 1

2 Contents GUANGZHOU Grade A Office Retail Residential Guangzhou Property Market 215 Review and 216 Outlook Colliers International

3 Guangzhou Colliers International Guangzhou Property Market 215 Review and 216 Outlook 3

4 Grade A Office Guangzhou s economy maintained steady performance in Q4 215, with the tertiary sector leading the growth. Official data showed that Guangzhou s GDP increased by 8.3% YOY during the first three quarters of 215, compared to 8.5% in the same period in 214. Tertiary industry grew by 9.3% YOY, an acceleration of.1 percentage point from the same period of 214, accounting for approximately 66% of the total GDP. Against this backdrop and limited new supply, the average vacancy rate in the Grade A office market decreased to the lowest level in the last six years and the average rent rebounded after a decline in 214. No en bloc investments were made in 215. Guangzhou s Grade A office market received three new projects with a combined effective office GFA of 267,599 sq m in 215, down 6.6% from the level in 214. Two office buildings, with a total GFA of 244,49 sq m, are located in the Pearl River New City submarket, accounting for more than 9% of the total new supply (by GFA). The third project is located in the emerging Bai etan area, and was partially for self-use. Blue Focus new setup of 4,5 sq m at Bank of Guangzhou Square in Pearl River New City; CITIC Securities Guangdong Branch s new lease of 3, sq m at Pearl River Tower; DHL s new setup of 2,3 sq m at Agile Center in Pearl River New City; and IT company Sungy Mobile s new lease at International Financial Center, among others. The limited new supply led the vacancy rate to decline by 4.1 percentage points YOY to 15.7%. In the Pearl River New City submarket, the average vacancy rate dropped by 8.2 percentage points YOY to 19.3%. In contrast, the vacancy rates in Yuexiu and Tianhe North-Sports Centre submarkets increased by 1.5 percentage points and.7 percentage points to 5.3% and 7.1%, respectively. Corporate tenants from the finance, trade, IT, professional services and logistics sectors were the main source of demand in 215. Headline leasing transactions included: domestic IT company Eygame s setup of approximately 5, sq m at Taikoo Hui in Tianhe North-Sports Centre; Deloitte s relocation of 5,1 sq m and domestic IT company Social Tech s setup of 2,77 sq m, respectively, at Yuexiu Financial Tower in Pearl River New City; domestic communications services company The average rent of Guangzhou s Grade A office real estate market rebounded by 2.6% YOY, to RMB155.4 per sq m (psm) per month, after declining.7% YOY in 214. This was mainly attributed to annual rental growth at existing projects. Pearl River New City maintained the highest average rent at RMB162.6 psm per month, up 1.7% YOY. In the Tianhe North-Sports Centre submarket, the average rent increased by 3.5% YOY to RMB162.5 psm per month, followed by Yuexiu (RMB119.8) and Pazhou (RMB112.). Rental growth was stronger in prime locations, supported by active demand and higher building specifications. Nevertheless, rental growth was constrained to a certain degree by pre-lease rental levels at new projects. Guangzhou s office investment market was quiet in 215, with no major investment transactions announced. Developers favoured strata-title sales, particularly in the Pearl River New City area. Figure 1: Guangzhou Grade A Office New Supply, Net Absorption and Vacancy Rate sq m Figure 2: Guangzhou Grade A Office Average Effective Rent and Change RMB psm per month 8, 35% % 7, 6, 5, 4, 3, 2, 1, % 25% 2% 15% 1% 5% % 1% 5% -5% -1% Source: Research, Colliers International, 216 Source: Research, Colliers International, Guangzhou Property Market 215 Review and 216 Outlook Colliers International

5 China s economic growth is targeted to be 6.5% for the next five years, according to the central government s 13th Five Year Plan. However, economic growth in the south China area, especially in the Pearl River Delta area, is expected to continue outpacing most of other regions in China. Demand for Guangzhou s office real estate market should continue to be underpinned by the city s status as the capital of Guangdong province, and a major trading hub for southern China. Demand is expected to mainly come from domestic tenants in the finance, IT and professional services sectors. Retail Guangzhou s retail sales of consumer goods grew by 11.4% YOY in the first ten months of 216, a deceleration of.9 percentage points from the same period of 214, according to the Guangzhou Statistics Bureau. New supply continued to grow in 215, though retail space in the city s prime areas remained limited. The large volume of new supply with below-average rental levels and increasing competition amongst landlords pulled down the average rent in 215. Nevertheless, mature projects with professional management in prime locations achieved rental growth during 215. Eight Grade A office projects across three submarkets are scheduled to complete in 216, adding a combined GFA of approximately 63, sq m. Four of these properties, with a total office GFA of approximately 411, sq m, will be located in the Pearl River New City submarket, including the landmark Chow Tai Fook Center. As a result, the average vacancy rate will increase moderately in 216. The large volume of new supply will generate competition for tenants and is expected to lead to a decline in the average rent in the short term. This will be offset to a degree by the high building specifications of some new projects. In the office investment market, several office properties in emerging business areas such as Panyu and International Financial City will enter the strata-title sales market. Capital value in the city s prime locations is expected to increase, supported by limited tradable assets. Four new projects totalling 482, sq m were completed during 215. Only one new project, GTLand Winter Plaza, was located in the city s prime retail area. Wanda launched new projects in both Luogang and Nansha Districts, the first shopping centre of their size and positioning in their districts, respectively. The fourth new project, ICON, is domestic developer R&F s first retail project in Guangzhou. Wanda s and R&F s projects target young consumers and families with mass market positioning. Supply in the prime locations continued to be limited in 215; however, opportunities were available at certain properties where landlords made adjustments to their trade and/or brand mixes. Such adjustments were seen at Taikoo Hui, Onelink Walk and Sun Valley in Tianhe District and Metropolitan Plaza in Liwan District, amongst others. In Grandview Mall and Sun Valley adjustments were made towards a more experience -related tenant mix, in order to compete with growing online shopping. The stable increase in per capita disposable income and consumption expenditure continued to attract both international and domestic retailers to Guangzhou, with many brands launching their first south China stores or expanding their presence in the Figure 3: Guangzhou Mid- to High-End Shopping Centre New Supply, Net Absorption and Vacancy Rate sq m Figure 4: Guangzhou Mid- to High-End Shopping Centre Ground Floor Rent and YOY Growth Rate RMB psm per month 6, 16% 1,4 2% 15% 1% 5% -5% -1% -15% 5, 4, 3, 2, 1, % 8% 4% 1,2 1, Ground Floor Rent Source: Research, Colliers International, 216 Source: Research, Colliers International, 216 Colliers International Guangzhou Property Market 215 Review and 216 Outlook 5

6 city during 215. The fast fashion category was especially active in 215, with New Look, Old Navy and SPAO all launching their first south China stores, and Muji, H&M, Urban Revivo and Uniqlo expanding their footprint. Demand from the F&B sector was also buoyant during 215, with domestic chains The Grandma s, Nice Meeting You and Teawood all entering the market. In addition, cross-border shopping stores or bonded stores, which are linked to policies at the Nansha Free Trade Zone, rapidly expanded in Guangzhou during 215. By contrast, luxury brands were less active in light of a decrease in sales. Louis Vuitton closed its first Guangzhou store at La Perla in 215. The average vacancy rate in Guangzhou edged down by.6 percentage points YOY to 8.8% by the end of Q4 215, despite the large amount of new supply. The vacancy rate in the city s prime retail areas declined by.7 percentage points YOY to 6.7%. In contrast, properties in emerging areas had an average vacancy rate of 11.%. The average fixed rent for ground floor property in Guangzhou s mid- to high-end shopping centres declined by 4.3% YOY to RMB1,65 per sq m (psm) per month, mainly due to the lowerthan-average rent in the new completions. However, landlords of projects in the city s prime retail areas continued to raise their rents during 215 on the back of strong demand. The average rent in the prime area increased by 1.4% YOY. No major investment transactions were announced in Guangzhou s retail investment market in 215. Landlords of mature and successful retail properties continued their lease-and-hold strategy. Most investment was made strata-title for streetfront shops or retail facilities attached to office buildings or residential communities. Nevertheless, investor sentiment was positive with both domestic and international investors actively seeking retail investment opportunities in Guangzhou. Six new projects with more than 5, sq m of GFA are scheduled to complete in 216. Three of these projects, with a total GFA of nearly 192, sq m, are located in prime locations, including the long-awaited Parc Central. The remaining three will be in non-prime retail areas. Notably, Parc Central, CapitaMall Sky+ and Panyu AEON Mall will be the first shopping centre projects by Sun Hung Kai Properties, CapitaMalls and AEON in Guangzhou, respectively. The large amount of new supply in the pipeline will drive further competition among landlords to compete for tenants as well as consumers, especially in the non-prime locations. As a result, projects will make adjustments in their trade and brand mixes, and the proportion of experience-type brands is expected to rise. As a result, the average vacancy rate will rise temporarily but will be limited by the high pre-leasing rate in projects in the prime locations. New completions in the non-prime areas are expected to have lower-than-average rental levels, which will constrain overall rental growth. However, well-managed properties in prime areas are expected to continue to see rental growth amidst limited supply and strong demand in the short to medium term. 6 Guangzhou Property Market 215 Review and 216 Outlook Colliers International

7 Residential Guangzhou s residential real estate market was active in 215, with a surge in sales volume and slight decline in average sales price. According to the Guangzhou Municipal Land Resources and Housing Administrative Bureau, total sales volume of new commodity housing in Guangzhou s nine central districts increased by 34% YOY to approximately 7.79 million sq m as of end-215. At the same time, the average sales price edged down by 1.5% on an annual basis. The pickup in sales volume was attributed to a series of government policies announced during 215 at both the national and local level, aimed at supporting the real estate market, though developers were cautious in their pricing strategies. A series of stimulus policies supported Guangzhou s residential real estate market during 215. At the national level, the People s Bank of China cut the one-year benchmark deposit rate in March, May, June, August and October in 215, which in turn lowered the benchmark mortgage rate. At the local level, Guangzhou maintained restrictions on certain purchases, but also lowered the down payment for mortgages using the housing provident fund in June and announced a series of policies which eased the application process and allowed more borrowing from the housing provident fund. Correspondingly, sales volume new commodity housing in Guangzhou s nine central districts surged by approximately 3% YOY in the second quarter of 215, 42% YOY in the third quarter and 2.9% YOY in the last quarter after a decrease of 28.% YOY in Q In addition, the launch of the Guangzhou Nansha Free Trade Zone boosted house sales in this area, with the sales volume surging by 94% YOY as of end-215. In contrast to the total sales volume, the average sales price decreased in 215. In Guangzhou s nine central districts, the average sales price declined by 1.5% YOY to RMB17,235 per sq m (psm). This was mainly attributed to cautious pricing strategies in several new projects, and the increase in the proportion of sales in the three suburban districts (up 3. percentage points YOY to 57%) In the six urban districts, the average sales price increased by 4.8% YOY to RMB24,27 psm. Guangzhou s residential real estate market is expected to remain stable in 216, and no major change in government policy is expected. Developers will continue to focus on reducing inventory, limiting an increase in sales price. Colliers International Guangzhou Property Market 215 Review and 216 Outlook 7

8 52 offices in 67 countries on 6 continents United States: 14 Canada: 31 Latin America: 24 Asia: 39 ANZ: 16 EMEA: 18 $2.3 billion in annual revenue For further information, please contact: Eric Lam Managing Director South China eric.lam@colliers.com Carlby Xie MSc, MRICS Director Research China carlby.xie@colliers.com Colliers International Guangzhou Room 72, Teem Tower 28 Tianhe Road Guangzhou 5162 PRC TEL billion square feet under management 16,3 professionals and staff About Colliers International Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is a global leader in commercial real estate services with more than 16,3 professionals operating from 52 offices in 67 countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 1 outsourcing firms by the International Association of Outsourcing Professionals Global Outsourcing for 1 consecutive years, more than any other real estate services firm. For the latest news from Colliers International, visit or follow us on Weibo (weibo.com/ colliers) and WeChat (ColliersChina). Disclaimer:This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s) All rights reserved. 8 Guangzhou Property Market 215 Review and 216 Outlook Colliers International